Do You Have to Claim Workers Compensation on Your Taxes?
You’ve just made your way through the thicket of administrative hurdles that accompany the workers compensation system in Kansas. You’re receiving payment for lost wages due to your temporary or permanent disability, and now you want to know if that money is taxable.
The answer in most cases is no, and even when it’s yes, the amount owed can be rather small.
If you have any questions about workers compensation in Kansas, our team of Wichita-based attorneys at Slape & Howard. We have helped countless others navigate the workers compensation system in the state and have been aggressively advocating for worker-friendly improvements to the laws governing workers compensation.
Workers Compensation in Kansas
Since the enactment of the 2011 Kansas Workers Compensation Act (KWCA), the state has created a system that favors the insurance companies and not the workers who get injured on the job. An injury under the KWCA must be the “prevailing factor” in your claim for disability. If you exacerbate a pre-existing condition or pre-employment injury, you can be denied.
On top of that, Kansas has mandated the use of the sixth edition of the AMA’s “Guide to Permanent Impairment.” This edition ties physicians’ hands in determining disability. You are no longer disabled if you cannot perform your duties at work. You must be impaired in your ability to care for yourself — eating, sleeping, personal hygiene, etc.
At Slape & Howard, we have been fighting both the KWCA and the adoption of the sixth edition, while all along continuing to employ our knowledge and resources to help employees throughout the state receive the benefits they’ve earned and deserve.
Taxable or Not?
Workers compensation falls into the same non-taxable category as:
Public welfare payments
Compensation for physical injuries or sickness (through an auto insurance claim or a personal injury lawsuit, for instance)
Disability benefits under no-fault auto insurance
Compensation for permanent loss or loss of use of a part or function of your body, or permanent disfigurement
In short, the benefits under workers compensation are fully exempt from federal and state taxes. Payments made to survivors under the same circumstances are also tax-exempt.
Exceptions to The Tax-Exempt Status
If you also receive payments from either Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), a portion of your workers compensation benefits may become taxable.
SSDI is a federal program available to taxpayers with disabilities who have paid Social Security taxes and earned enough credits to qualify. Generally, this means having worked for five to ten years. SSDI is taxable income in and of itself, but the federal government will use your workers compensation benefits to offset what you’re being paid under SSDI. You may owe taxes on the offset portion.
SSI is a federal program for low-income individuals over the age of 65 who are blind or disabled but otherwise have never worked or earned enough credits for SSDI. Again, the government will use workers compensation to offset the SSI payments, and the offset will be taxable.
The first thing to remember is that your income must pass a certain level for the tax to kick in. That level is:
$25,000 for taxpayers filing as single, head of household, qualifying widow(er) with a dependent child, and married filing separately who did not live with a spouse at any time during the year
$32,000 for married taxpayers filing jointly
$0 for married taxpayers filing separately who lived together at any time during the year
The offset to your SSDI or SSI payments is computed by using your pre-disability earnings as the benchmark. When your offset to your Social Security income rises above 80% of your previous monthly wages, you will be taxed on that portion.
Say you earned $2,500 a month prior to your disability. Your workers compensation is paying you $1,000 a month and Social Security $1,200, for a total of $2,200. Since your previous monthly income was $2,500, that sum represents 88% of your former wages. A $200 offset would bring it down to 80%, so you would owe taxes on $200 a month if your income passes the thresholds listed above.
Two other circumstances can trigger tax liability:
You previously deducted injury-related medical expenses from your taxes
You received a lump-sum payment as a personal injury award
What Happens if You Retire?
If you retire while on workers compensation, several things can happen. First, if you are on temporary disability, your lost-wage compensation will stop once you retire, but your medical payments will continue until you are recovered.
If you are on permanent disability, all payments should continue, but an offset may be put in place for your added income. Say you receive $1,750 a month in workers compensation and now receive $1,000 from a private retirement fund, your workers compensation can be offset to $750.
If your retirement is funded by Social Security or Railroad Retirement, however, those payments can be offset by the amount of your disability payment from workers compensation.
Experienced Workers Compensation Attorneys
Whatever situation you find yourself in while on workers compensation, our attorneys at Slape & Howard will be happy to listen to your story and advise you of your best options going forward.
Better yet, as soon as you’re injured at work, contact us and let us help you navigate the system. We can help you get the medical evaluation you need, so you can meet your claim filing deadline. If you’re denied or shortchanged, we can help you file appeals and strive to get you what you deserve.
Wherever you are in Kansas, our team at Slape & Howard is on your side when it comes to workers compensation. Contact us immediately for a free case evaluation.