If you received workers' compensation in 2020, you may have some questions about what to expect for tax time in 2021. The big question that most people have after receiving workers' comp is if they can expect to see what's been paid out reported on the W-2 forms they'll receive from their employers. Will your employer be categorizing your 2020 workers' comp as taxable income? Take a look at what to expect.
Read More: How Do Workman's Comp Payouts Work?
Is Workers' Compensation Taxable Income?
Many people assume that they'll be seeing their workers' comp totals for the year reflected on the W-2 forms they receive from their employers ahead of tax season. No, your employer didn't make an error if you don't see your workers' compensation reflected on 2020's W-2. That's because workers' compensation is not considered taxable income. As a result, it is not reported on your W-2 form.
Read More: W-2 Forms: What It Is, Who Gets One & How It Works
Why Isn't Workers' Compensation Taxable Income?
The U.S. Department of Labor's Office of Workers' Compensation Programs (OWCP) pays out a combination of monetary payments and medical benefits to workers who are injured at work. Qualifying situations include accidents, injuries or occupational diseases related to a person's work. When an employee accepts benefits, that employee can no longer sue an employer for liability regarding the accident, injury or disease involved.
Why You Might Still Receive a W-2
The income that you receive if you return to work after qualifying for workers' comp will be taxable. That means that it will be reflected on your W-2 form for the year. The taxable status applies even if you're working in limited or light capacity due to your injury.
Workers' compensation could be considered taxable if you're simultaneously receiving disability benefits through Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). At this point, the workers' compensation offset kicks in. Here's what you need to know:
- Typically, Social Security Disability Insurance (SSDI) benefits combined with disability and workers' comp payments cannot total more than 80 percent of what was being earned at full employment.
- While your dual payouts would technically be considered taxable if they hit a threshold, very few people receive enough in benefits to actually be taxed.
- Rules and requirements for the workers' compensation offset vary by state.
Read More: Do I Need to Claim Workman's Comp on My Tax Returns?
If you have a complex situation, it's best to work with a workers' compensation or disability lawyer to ensure that you're handling the workers' compensation offset properly. An attorney may be able to help you to structure your workers' comp settlement to minimize your offset for a reduction in 2020's taxable income. In most cases, you can simply expect to receive a W-2 from your employer that only reflects any wages earned in 2020 during a time when you were not receiving workers' compensation benefits.
Final Thoughts on Worker's Comp and W-2 Forms
In closing, workers' compensation payments are generally not considered taxable income. This means you shouldn't expect to see your payouts listed on your W-2. This applies for both state and federal taxes.
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Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.