After you have reached a settlement in a California workers’ comp case, you might wonder if your settlement proceeds will be taxed? Luckily, workers’ compensation benefits and settlements are not taxable under state or federal law in most instances. There are a few important exceptions so its important to talk with your workers’ compensation attorney about how your settlement is structed.
At Ratto Law Firm, P.C., our California workers’ compensation attorneys are ready to assist you. We’ll discuss all of the implications of your workers’ compensation settlement and what you should expect when it comes to paying taxes on anything you receive.
Are Workers’ Comp Settlements Taxable in California?
Under both IRS rules and California tax law, workers’ compensation benefits paid for a job‑related injury or illness are exempt from income tax. This includes:
- Temporary disability payments
- Permanent disability payments
- Medical mileage reimbursement
- Medical treatment paid by the insurer
- Stipulated Awards
- Compromise and Release settlements
Whether you receive weekly payments or a lump‑sum settlement, the money is considered compensation for an injury rather than taxable income.
Why Workers’ Comp Is Not Taxed
Workers’ comp settlements are treated differently than wages. They are meant to replace income you lost due to an injury and they help cover medical costs. The IRS considers these benefits as non-taxable disability payments, rather than ordinary income. California follows the same basic rules in this regard.
When Workers’ Comp Can Affect Your Taxes
While workers’ comp itself is not taxable, it can affect the taxation of other benefits you receive. The most common situation involves Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).
1. Workers’ Comp Offset for SSDI
If you receive SSDI and workers’ comp at the same time, the Social Security Administration may reduce your SSDI payments through a workers’ comp offset. When this happens:
- Your workers’ comp settlement remains non‑taxable
- But a portion of your SSDI may become taxable
This happens because the offset increases the amount of SSDI considered taxable income.
2. Workers’ Comp Offset for SSI
SSI is needs‑based, so workers’ comp benefits can reduce your SSI payments. SSI itself is not taxable, but the reduction may affect your overall financial picture.
3. Retirement Benefits
Workers’ comp does not affect the taxation of Social Security retirement benefits. However, if you retire early due to your injury, your retirement income may be taxable depending on your total earnings.
Are Medical Payments Taxable?
No. Any medical treatment paid by the workers’ comp insurer, including surgeries, therapy, prescriptions, and medical equipment, is not taxable.
You also cannot deduct these expenses on your tax return because you did not pay them out of pocket.
Are Permanent Disability Payments Taxable?
Permanent disability payments are not taxable, whether paid weekly or included in a lump‑sum settlement. California’s permanent disability rating system determines the amount, but the tax status remains the same.
Are Compromise and Release Settlements Taxable?
A Compromise and Release (C&R) is a lump‑sum settlement that closes your case completely, including future medical care. Even though the settlement includes money for future medical treatment, the entire amount is non‑taxable.
This includes:
- Permanent disability value
- Future medical buyout
- Any negotiated compensation
You do not need to report the settlement as income.
Are Stipulated Awards Taxable?
A Stipulated Award provides:
- Biweekly permanent disability payments
- Lifetime future medical care
Both the payments and the medical benefits are non‑taxable.
What About Lost Wages?
Temporary disability payments are designed to replace lost wages, but they are still not taxed. This is different from state disability insurance (SDI), which is taxable in some situations.
Seek a Workers’ Compensation Settlement and Understand the Tax Implications With an Experienced Attorney
The workers’ compensation process is complicated all the way through, including when it comes time to handle any settlement on your taxes. A skilled attorney can provide you sound legal advice, seek the compensation you deserve, and discuss any tax implications with you.
Our team at Ratto Law Firm, P.C. provides you with the advice and representation you need. Contact us today for a consultation.