Pennsylvania Workers’ Compensation Benefits and Taxation

I often get asked the important question regarding whether workers’ compensation benefits, specifically a lump sum settlement, is taxable income?  

The quick answer is — NO.  Workers compensation benefits are not a taxable event.  That applies to not just your weekly benefits checks, but also if you settle your case for a lump sum amount.  That also applies to settlements in general, irregardless of whether they are indemnity only or a full compromise and release settlement.  Here is the link to the IRS publication regarding workers compensation and taxes.  
However, if you are on or will be on social security disability, there is an offset that applies to as workers compensation settlement.  The net amount that you receive (your settlement amount minus the attorney fees and any set aside future medical expenses) should be pro-rated over the course of your remaining life expectancy because it will limit the potential post-settlement tax consequences to you as a result of your settlement as it relates to social security disability.  If you are not on social security disability and do not plan on going on to the program, then no concern to you.  If you are on SSD or plan to be on SSD, you should immediately contact us at Mooney & Associates to discuss the impact settlement has on your social security benefits.  
Now that we have discussed those two important items, it is critical that you speak with a workers’ compensation attorney before settling your case with your workers comp insurance carrier.  You should also consult with an attorney from Mooney & Associates to determine not only if you are getting fair value for your work injury, but if settlement is even in your best interest.  Call us today at 717-632-4656 or 1-877-632-4656 to set up a FREE consultation to discuss your potential settlement.  Remember, once you settle and the Judge approves your settlement, there is no going back.  Protect your rights and best interests!  

Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors.  . . . If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Other Income under Miscellaneous Income, later.

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