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Does Workers’ Compensation Affect Your Tax Returns?

Posted in Workers Compensation on September 4, 2022

Anytime a person sustains an on-the-job injury in Arizona, they should be able to recover workers’ compensation benefits to pay for their medical bills and a portion of their lost wages if they are unable to work. However, as with every other facet of life, individuals need to be cognizant of how receiving any benefits can affect the current. In general, workers’ compensation benefits will not affect a person’s tax returns.

Workers’ Compensation Benefits and Taxation in Arizona

In general, workplace injury victims will find that their workers’ compensation benefits are not subject to taxation. Therefore, they will not have to do anything out of the ordinary when it comes time to file their taxes and get a tax return.

At both the state and federal levels, workers’ compensation benefits are not considered taxable income. This includes payments that are made as one lump sum or ones that are paid out over time in a structured settlement through traditional workers’ compensation payments. Individuals will likely not receive any documentation related to their tax benefits, similar to what they would receive through a W9 or a 1099.

However, workplace injury victims do need to be aware that there are situations where they could face taxation if they receive other types of benefits, including Social Security Disability (SSDI) or Supplemental Security Income (SSI).

Individuals would receive these types of benefits if they sustain a permanent job-related injury and decide to apply for various types of benefits. If they receive SSDI or SSI, the workers’ compensation benefits they receive may get taxed.

It is important to understand that if a person receives SSDI or SSI along with workers’ compensation, the SSDI or SSI would likely be offset by the workers’ compensation payments. This is done so that the system can ensure that an individual does not receive more than 80% of their prior income, the income they were receiving at the time the injury occurred.

It is also important to realize that if an individual goes back to work at any time, including on light duty or at a different job from the one where they received their injury, then they will be expected to pay taxes on that income. Additionally, seeking employment while also receiving workers’ compensation benefits could jeopardize the overall claim, particularly if a person attempts to hide the fact they are working another job.

Working With an Attorney

If you have sustained a workplace injury and are unsure about what types of benefits you are entitled to, we encourage you to reach out to a skilled on-the-job injury lawyer and Arizona. An attorney can review your case and help determine whether or not you should be receiving workers’ compensation benefits.

If you have any questions about taxation as a result of receiving workers’ compensation or any other type of disability benefits, we encourage you to speak to your accountant. Only an accountant can definitively tell you about your tax obligation throughout the year.