You may have heard some confusing tax information about Social Security benefits and your worker’s compensation – go figure. The rules of the IRS certainly are not always as clear cut as one would hope. When it comes to figure out right from wrong, you may be left even more confused than when you started.
Let me see if I can set you straight…
Your benefits received through worker’s compensation are not taxable as income by the IRS. No matter how much you get back for lost wages, you will not have to report the benefits as income.
When you add Social Security benefits to the mix, the situation surrounding your worker’s compensation benefits becomes more complicated. Social Security disability (not SSI) is taxable as income and the IRS expects you to report the income generated by these benefits in a tax years.
When Social Security and worker’s compensation benefits are received at the same time, there will be a reduction in the amount of Social Security benefits you receive based on worker’s compensation benefits. However, there is a ‘but’ coming here –
But even though your Social Security benefits have been reduced, the amount being reported as having been received by you is still listed as the amount before the reduction. You don’t actually get the money but you are still being taxed on the Social Security benefits you haven’t received.
Technically, this translates into the reality that you are being taxed on untaxable worker’s compensation. The portion of comp benefits equal to the amount of Social Security being reduced is still being taxed, making it appear part of your worker’s compensation benefits are counted as income.
It certainly seems unfair that anyone could be taxed on monetary benefits they never received and it doesn’t seem right that taxpayers are liable for taxes on a non-taxable income. At the present time, there is not much to do other than consult with a tax professional if you take in benefits from both sources. It certainly does pay to get educated about your liabilities when it comes to the IRS so as not to violate tax laws.