Workers' Compensation Benefits: How Do They Affect Your Taxes?

If you were injured at work this year and incurred medical expenses or were unable to work as a result, there's a good chance you collected workers' compensation benefits at some point. Now, as you prepare to file your tax return, you may be wondering how these benefits will affect your return and what steps you need to take to report your income. By understanding how workers' compensation benefits affect your taxes, you can ensure your return gets done correctly the first time around.

For How Long Did You Collect Benefits?

To determine how workers' compensation benefits will affect your need to file a tax return, start by considering how long you collected benefits in the past year. Unless your only form of income throughout the year was through workers' compensation, you'll still need to file a tax return. However, if your only income in the last year came from workers' compensation, then you may not need to file a tax return at all. That's because these benefits are non-taxable. As such, your employer isn't legally required to send you a 1099 summarizing how much they paid you in workers' compensation--so it'll be up to you to keep track of that information.

What Needs to Be Reported?

Even if your only actual income was from workers' compensation benefits in the past tax year, there are still some circumstances in which you'll need to file a return. For example, if you started taking money out of a 401k retirement fund as a means of having some extra income while you were out of work, then you will need to report this as income because retirement benefits are taxable. The same goes for situations where your workers' compensation benefits resulted in a reduction of your Social Security benefits. If you're in doubt about what needs to be reported as income, the best thing you can do is work with a workers' compensation lawyer.

What About Wages Earned on Light Duty?

Finally, if you returned to work on "light duty" at any point throughout the year, understand that this income is still just as taxable as the income you were making before your work-related accident. Don't make the mistake of failing to report this income on your tax return, or you may find yourself having your return denied or even facing a dreadful tax audit, which can take years (and thousands of dollars) to resolve.

If you have further questions about how your workers' compensation will affect your tax return, get in touch with a workers' compensation attorney from a firm like Franco Law Firm, or contact a tax professional.