If your income is temporarily supplemented by Workers’ Compensation, it is understandable to then ask questions about whether or not Workers’ Compensation benefits or settlements are taxable in Pennsylvania.
Generally, Workers’ Compensation settlements are not taxed at the state or federal levels. In some circumstances, benefits might be taxed if recipients also receive Social Security benefits and the sum of their benefits exceeds 80% of their average earnings. If you accept a settlement, whether in the form of structured payments or a lump sum payment, your settlement should still not be taxed unnecessarily. Accepting a settlement instead of Workers’ Compensation benefits will depend on your specific situation and diagnosis. If you are able to file a third-party lawsuit in Pennsylvania, the settlement you receive will also not be taxed.
Call the Pennsylvania Workers’ Compensation attorneys at Lerner, Steinberg & Associates at (215) 355-6400 to schedule a confidential and free assessment of your case today.
When Are Workers’ Compensation Benefits Not Taxable in Pennsylvania?
In most cases, Workers’ Compensation benefits are not taxable, as they are not considered income in the eyes of the IRS. That does not mean that Workers’ Compensation benefit recipients have no tax liability for other forms of income in Pennsylvania.
Income taxes are paid only on money that is part of your “income.” Though the IRS defines income as money you receive from any source, Workers’ Compensation payments are specifically excluded from this definition. That means when the IRS calculates your income, they ignore Workers’ Compensation payments. Similarly, you will not have to pay state taxes on your Workers’ Compensation benefits in Pennsylvania.
If you are not working another job, and your only income is through Workers’ Compensation, then you should have $0 worth of “income,” by the IRS’s definition. That means you do not need to pay taxes on your benefits. However, it is important to talk to a tax expert about whether you need to pay taxes on other benefits or other income in your household (e.g. your spouse’s income).
Employers might offer transitional jobs to employees receiving Workers’ Compensation benefits so that the lost-wage benefits they receive go down. If you are able to work a transitional job and earn a lower income than what you previously did, you will likely have to pay taxes on that income. Even if that is the case, your Workers’ Compensation benefits will remain untaxed in Pennsylvania.
When Are Workers’ Compensation Benefits Taxable in Pennsylvania?
Although Workers’ Compensation benefits are, more often than not, not taxable in Pennsylvania, there are exceptions in instances where injured employees also receive certain Social Security benefits.
Social Security Disability Insurance (SSDI) benefits are provided to people who can no longer work because of qualifying medical conditions. Though you can receive SSDI and Workers’ Compensation benefits simultaneously, they cannot add up to more than 80% of your average earnings. If they do, your SSDI benefits will be lowered so that your total benefit amount meets the requirements. The amount that your SSDI benefits is lowered is the amount of Workers’ Compensation benefits that will be taxed. As our Bucks County Workers’ Compensation lawyers can explain, you are taxed on the offset of benefits, which, for various reasons, is taken out of your monthly Workers’ Compensation benefit check for as long as your combined benefits are too high.
Again, this only applies to those receiving SSDI benefits and Workers’ Compensation benefits at the same time, so long as though benefits add up to be more than 80% of their average earnings. If you get both benefits and they do not equate to over 80% of your average earnings, your Workers’ Compensation benefits will remain untaxed in Pennsylvania.
How Are Lump Sum Workers’ Comp Settlements Taxed in Pennsylvania?
Sometimes, instead of receiving Workers’ Compensation benefits as ongoing payments, it is better to receive them as one lump sum. Especially if you are seeking other benefits, like disability payments, receiving a settlement can help you avoid paying additional taxes on the benefits.
Most of the time, a settlement can cover any potential payments that ongoing Workers’ Compensation would normally pay. However, instead of receiving the benefits piece by piece, you can receive them as one large payment from the beginning or structure them however you want. As part of the settlement, you may be able to receive the same amount of money but split it into smaller payments over a longer period of time – or larger payments over a shorter amount of time.
The flexibility of receiving a settlement for Workers’ Compensation is one of the biggest benefits to receiving a settlement. Since Social Security is often reduced if your Workers’ Compensation benefits are too high, restructuring your Workers’ Compensation settlement can help prevent that. This also helps reduce the potential taxes you might pay on your benefits. That said, lump sum Workers’ Compensation benefits are not taxed simply because of the way injured workers receive their settlements. That is to say, you will not be taxed more on a lump sum payment, and, in many cases, will not be taxed at all. Lump sum Workers’ Compensation settlements are viewed similarly to lawsuit settlements in that respect.
Is a Pennsylvania Workers’ Compensation Settlement Right for Me?
Knowing whether to accept a Workers’ Compensation settlement or receive benefits for the duration of your injury is often challenging for injured workers. Our lawyers can help you understand how Workers’ Compensation payments are structured in Pennsylvania, how much you would receive, and how long the benefits would last. You can then compare that to the possible sum of a settlement to make an informed decision.
Receiving a settlement is always part of a calculated risk. If your injury is one that has a clear, projected course of treatment, predicting the overall medical benefits might be simple. However, if your condition is difficult to treat, such as cancer, your prognosis may be unclear. This may make it harder to predict what costs your settlement will need to cover and may make settling harder.
In any case, your injury or condition may have a set limit to how much you can receive in wage-loss benefits. Settling for this amount is often simpler to calculate. For example, in Pennsylvania, there is a predetermined payment schedule for workers that have sustained certain injuries, like loss of a limb or digit.
In many cases, victims have little choice but to negotiate a Workers’ Compensation settlement or accept benefits as they are paid, as filing an insurance claim is the sole way for victims to recover compensatory damages following a workplace accident in Pennsylvania. There are exceptions for third-party lawsuits, meaning victims can sue if someone other than their employer caused their injuries. Most often, this involves negligent manufacturers that produce and distribute defective products. Our attorneys will explore the possibility of filing a third-party lawsuit, as doing so might enable you to claim greater compensation, including that for pain and suffering, which is not available in a Workers’ Compensation settlement in Pennsylvania.
Workers’ Compensation Lawyers in Delaware County Offering Free Consultations
To have our Philadelphia Workers’ Compensation lawyers evaluate your case for free, call Lerner, Steinberg & Associates now at (215) 355-6400.