If you get injured in the workplace, compensation for employees benefits everyone. You receive compensation for workplace injuries or illness without suing. Your employer and colleagues do not have to worry about liability for the accident. Are workers comp settlements taxed?

Employee benefits are not usually considered as taxable income at state or federal level. A lonely exception arises when a person receives disability benefits through social security disability insurance (SSDI) or additional social security benefit (SSI). In some cases, the social security administration (SSA) may reduce a person’s SSDI or SSI so that the total amount of employee benefits and invalidity pensions remains below a certain threshold.

Exceptions: when employee benefits can be taxed

If you return to work in a modified role during recovery, remember that all earnings from work will be taxable because they are actually “earnings” from work. However, benefits due to loss of remuneration paid to employees will still not be taxed.

Although the answer to this question is quite simple for ordinary employee benefits, it becomes somewhat more vague and confusing if these benefits are combined with social security disability (SSDI) or some kind of retirement plan. In short, any additional benefits you receive through Social Disability Insurance (SSDI), Additional Social Benefit (SSI) or any other plan will be taxed at the applicable rate.

Are workers comp settlements taxed?

If the injured employee also receives SSDI or SSI disability allowance, the Social Security Administration (SSA) may reduce the payment of a person’s SSDI or SSI allowance so that the total amount of employee benefits and disability benefits remains below a certain threshold. This is known as “compensation of employee compensation”.

A court in the United States states that benefits for injured employees may not be taxed

Some additional clarity about the relationship between SSDI, employee compensation and taxes was issued by the US tax court in 2011. Their decision was based on whether employee benefits could be excluded from taxable income.

This case took place here in Colorado and concerned Linda Sherar. Mrs. Sherar suffered two serious injuries, requiring her to undergo 12 separate operations. She began to receive employee benefits in 1999, and applied for SSDI in 2003. Although her initial application was rejected, she eventually began to receive SSDI benefits in 2007.


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