It’s tax season once again, and, as an injured worker collecting benefits over the last year, you are worried that you must pay income tax on the money you have received. You can put your mind at ease—the good news is that workers’ compensation is not considered taxable income by either Ohio or the IRS. You will not have to declare your benefits on your tax forms this year.
This Applies to All Forms of Workers’ Comp Benefits
Regardless of the kind of workers’ comp benefits you have been awarded or the manner in which you collect them, the money will not be taxed. This includes:
- Temporary total compensation checks
- Wage loss compensation
- Structured settlements
- Lump-sum settlements
- Death benefits for surviving spouse and dependents
Because this money is paid under Ohio’s workers’ compensation law to make up for what you have lost due to a workplace injury or occupational illness, it is exempt from state and federal income tax.
A Word About Lump-Sum Payments
When awarded permanent total disability (PTD) by the Industrial Commission, you have the option to settle your claim and receive the payout in one lump sum. This means that rather than getting biweekly checks over several years, your compensation is prepaid all at one time. This might be a tempting option, especially given that the lump sum will not be taxed, but it’s important to understand what you might be giving up. First of all, unless you die prematurely, the lump sum will not be as much as you ultimately get if you choose monthly payments. Secondly, it requires you to budget effectively to have money to live on for years to come. Once you receive the lump sum, you can spend it on whatever you want—a new car, a down payment on a house, a child’s college tuition, etc.—but if you find you need medical treatment for the work injury down the road and don't have other insurance to cover costs, you may not have the money to pay for it. You cannot go back to the BWC to ask for more because they have paid you everything you were owed. In other words, if you know you are not a good money manager, a lump sum is probably not a wise choice when you could opt for a steady stream of income—also tax-free.
Other Forms of Disability Payments Are Taxable
Many workers who qualify for workers’ compensation benefits are also eligible for other forms of disability and income, some of which are taxable. For example:
- Pensions. If you collect a private or union pension after becoming disabled, this income will be taxed if it exceeds the IRS’s minimum gross income filing requirements.
- SSDI. Social Security Disability Insurance is for workers who have paid Social Security payroll taxes for a certain amount of time and can no longer work because of a physical or mental impairment. SSDI can be taxed if your total income (NOT including workers’ comp) exceeds the minimum threshold.
- SSI. Supplemental Security Income is for low-income and disabled individuals who have rarely or never worked. It is exempt from taxation.
- VA disability benefits. Disabled veterans receiving cash benefits do not pay income tax on the benefits.
- Wages. If you are cleared for restricted work while still receiving workers’ comp benefits and qualify for wage loss compensation, the wages you earn will be taxed as income, although the workers’ comp income will not be taxed.
Sometimes, the tax question can get complicated when combining several forms of disability and income. Your workers’ comp attorney and a tax advisor can help make sure you pay the taxes you owe, and no more.
The Team at Monast Law Office Will Keep You Informed
Disabled workers collecting compensation rarely run into tax trouble, but if you have dutifully paid income tax your entire career, it can be worrying and confusing to suddenly not owe taxes on a portion of your income. When you work with Monast Law Office, you won’t have to worry about getting into trouble with the IRS. You can learn more about Ohio Worker’s Compensation by requesting a free copy of my book, The Worker’s Guide to Injury Compensation in Ohio, or calling our office at 614-334-4649.
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