Are Workers’ Comp Benefits Taxable in California?

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is workers comp taxable in California?

State law requires California employers to have workers’ compensation insurance in the event one of their employees suffers injury. Such benefits can be a crucial lifeline after a worker incurs medical bills and isn’t able to work or collect a paycheck. State or federal agencies may tax these compensation payments. If you’ve suffered an on-the-job injury and are receiving workers’ compensation benefits, you can discuss the tax implications with a knowledgeable Long Beach workers’ compensation attorney at Harting Simkins & Ryan, LLP.

Taxes on Workers’ Compensation in California

Worker’s compensation money is exempt from taxes in the overwhelming majority of cases. Worker’s compensation is a public, federally funded benefit that serves to protect injured workers while they recover. Since it is a tax-funded service, it is free from tax that would otherwise feed its own money back into the system.

Workers’ comp is in the same tax category as other government benefits, such as public welfare or compensation for personal injury in California and sickness. This also applies in cases of survivor’s benefits. Income received in this manner will have no withholding, nor will you have to pay taxes when you file on April 15.

Understanding Exemptions

It is important to understand that a few exceptions to the tax-free status of workers’ compensation can mean taxation. Specifically, your workers’ compensation benefits may be taxable if you also receive social security benefits, including disability or supplemental income.

There is a rule regarding federal benefits in which your combined WC and SSDI income cannot exceed 80% of your pre-injury income. Social security benefits offset any income above this limit. Whether SSDI or SSI, the income decreases and that offset is taxable. Note that the government taxes the social security income, not the worker’s compensation. This is despite the fact that it is the worker’s comp benefits that payout.

To determine your benefits, the agency uses the largest of the following three numbers:

  • Your average monthly income based on your initial benefits application
  • 1/60 of the sum of your wages in your five highest-earning consecutive years
  • 1/12 of your total wages from the highest-income year in the last five years

Most workers collecting workers’ compensation are not also collecting social security, but in cases in which a worker’s condition deteriorates, they may also end up on permanent disability benefits. Other public benefits can impact your taxability, such as retirement benefits. Returning to work also may affect the tax liability on your previously earned workers’ compensation.

Benefits are also taxable if you exceed certain base amounts of income for your tax situation. For example, earning more than $25,000 as a single tax filer can result in taxable income. The number for married filers is $32,000 and only $0 for married candidates filing separately on their taxes. Keep this in mind if you intend to file taxes separately while married.

In some cases, benefits may have a low enough tax liability to have only a negligible impact on your finances. If your pre-injury income, for example, was around $3,000 a month, then you cannot exceed 80% of that total with your SSDI and WC income. So, if you receive above $2,400, which is 80% of $3,000, then the SSDI will $2,400. The taxable part of your disability income is the reduction. If your offset is $150, that is the amount that may be taxable.

Who to Ask for Help

If you need help understanding tax implications for your workers’ compensation funds, you may need to speak with a Long Beach personal injury attorney. Workers’ comp should be a protection against injury in the workplace, and if your injuries are severe your finances and taxes may be complicated. A lawyer from Harting Simkins & Ryan, LLP experienced in the field of disability benefits can offer useful legal counsel to prepare for tax day.