Are Workers’ Compensation Settlements Taxable in Pennsylvania?

If you are relying on Workers’ Compensation, you usually receive a maximum of 2/3 of your normal paycheck.  If you have to pay taxes on top of this, your take-home pay may be lower than you would expect.  Workers’ comp. is paid because you need it after an injury, and you have no other choice except to apply for Workers’ Compensation. in most cases.  Fortunately, Workers’ Compensation. payments are not usually taxable, but some lump-sum settlements might be.  The Workers’ Compensation attorneys at Lerner, Steinberg & Associates explain.

Is Workers’ Compensation Taxable?

Workers’ Compensation pays two primary types of benefits.  The first type is medical benefits paid to cover the costs of your medical care to recover from an injury.  If you use an approved physician and follow their care plan, anything they deem medically necessary should be paid for directly from Workers’ Compensation.  The second type is wage-loss benefits, paid to you instead of your normal paycheck.  You are only eligible for Workers’ Compensation. because you are too injured to work – which means that taking another, less-demanding job while you recover might hurt your eligibility.  So, Workers’ Compensation. pays wages to injured workers.  The rate is reduced to 66 2/3% of your normal wage, capped at a certain amount, but this is still helpful for supporting yourself and your family while you recover.

Both of these benefits are not taxable.  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.  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’ definition.  That means you don’t 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).

Workers’ Compensation might lead to taxes if you also receive Social Security benefits.  Social Security can pay disability benefits through Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).  When you receive these benefits alongside Workers’ Compensation, you might face taxation on some of the benefits.  Work with your Workers’ Compensation lawyer on calculating a settlement that helps reduce your tax burden.

Taxability of Workers’ Compensation. Settlements

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.

Is a Workers’ Compensation. Settlement Right for Me?

Talk to an attorney about whether a settlement is right for you.  Your Workers’ Compensation. lawyer can help you understand how Pennsylvania’s Workers’ Compensation. payments are structured, particularly how much you would receive and how long the benefits would last.

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.

Always talk to an attorney before accepting a settlement for Workers’ Compensation.  It is important to make sure that your settlement fully covers your needs and that it is structured in the best way possible.

Workers’ Compensation. Lawyers in Delaware County Offering Free Consultations

If you or a loved one faced injuries from a workplace accident or suffers from a work-related condition, talk to our lawyers today to discuss your case.  It is important to have an attorney review your settlement offer and help you understand what taxes you may have to pay on your Workers’ Compensation benefits.  For a free consultation on your case, contact Lerner, Steinberg & Associates today at (215) 355-6400.