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Written by Harold Goedde | Posted in 1040 Tax Calculator • 1099 • Disability • Social Security

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.

General Rules

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.

Tax Consequences

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.

Conclusion

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.

Harold Goedde

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.