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Do I Pay Taxes on My Worker’s Compensation Payments?

Do You Have to Pay Taxes on Worker’s Compensation Benefits

Do You Have to Pay Taxes on Worker’s Compensation Benefits

If you get injured at work or develop a work-related illness in Mt. Vernon, IL, then you may be eligible for worker’s compensation benefits. Workers’ comp is a no-fault system, and therefore, you will get compensation irrespective of who is responsible for your injury or illness. However, after receiving the payment, determining whether it is taxable or not can be quite challenging. This is because although most of the workers’ comp benefits are not taxable, a portion of it may be taxable. Below are some tips you can count on to make this distinction.

do you have to pay taxes on workers compensation mt vernon illinois

The Rule of the Thumb

The general rule is that if your workers’ comp payments have to do with lost income or wages only, then it is going to be an assessable income, whether it is paid periodically or in a lump sum. This is because compensation is like a substitute for taxable income such as wages or salary, and therefore, it takes the same character. The legal fees incurred in pursuing such compensation are generally considered to be tax-deductible.

On the other hand, if the compensation is for a workplace personal injury only, then the payment will be tax-free whether it is paid on a periodic basis or in a lump sum. Personal injuries include physical, mental, and physiological damages suffered due to work-related reasons. The legal fees and other costs incurred in pursuing such compensation are generally not tax-deductible.

Some Exemptions

workers compensation taxes mt vernon illinois

There are a few exemptions to the rule explained above. For instance, if an injured employee receives supplemental security income in addition to worker’s compensation, then they may have to pay taxes. To be precise, the payments received from Social Security would have to be reduced, and the difference created by payment of workers’ compensation is going to be taxable. However, in most cases, the amount is small and negligible for taxation.

If you have received both workers’ compensation payment and Social Security Disability benefits, the Social Security benefits may be taxable to a certain extent. If a part of the workers’ comp benefits reduces the Social Security, that part is going to be treated as Social Security income, and therefore, it is going to be taxable.

The Takeaway

Overall, it is apparent that determining whether your workers’ compensation benefits are taxable can be quite a challenging thing to do. It is therefore wise to involve your personal injury lawyers to ensure that you understand what is taxable and what is not taxable to avoid getting in trouble with IRA.



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