Workman’s compensation for on-the-job injuries is non-taxable if it is to compensate the employee for medical care. But when a person also receives Social Security disability benefits, these benefits can increase the amount of Social Security subject to tax. This article will describe how this interaction occurs and its effect on the amount of taxable Social Security and increase in tax owed.
Workman’s compensation for on-the-job injuries is not taxable if it is to compensate the employee for medical care. However, Social Security disability benefits are taxable under the same rules that apply to Social Security retirement income. When a person receives workman’s compensation, sometimes the Social Security disability benefits are reduced. A detrimental effect of this is that the taxable portion of Social Security retirement income is determined as if there is no reduction. The combined amount of workman’s compensation and Social Security disability benefits cannot exceed 80% of the person’s “average current earnings” before the disability. If the total exceeds 80%, the Social Security disability benefits are reduced by the excess. But the amount of Social Security benefits reported on SSA 1099 also shows a reduction (“workers compensation offset”) and is added to the actual amount of Social Security paid during the year, even though the reduction offset is not actually paid.
This offset increases the amount of Social Security benefits reported on SSA 1099. The amount of Social Security benefits that are included in Adjusted Gross Income is based on an IRS formula related to other income (for example, wages, pensions and investment income). The taxable portion is automatically computed by tax return preparation software. There is also information in the form 1040 preparation instructions that provides a step-by-step formula to determine the taxable portion reported on line 20 of form 1040.
Workman’s compensation, in conjunction with receiving Social Security disability benefits, interacts with Social Security retirement and may increase the amount of taxable social security which will increase the amount of income tax owed.