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Are Workers Comp or Social Security Disability Benefits Taxable?

workers compensation income tax return paperwork

It is that time of year again, the time to file federal and state income taxes.  It is also the time I get calls from clients asking if the benefits they received during the year are considered taxable income. I will take the time to explain both separately.

PA Workers Compensation wage loss benefits are NOT taxable

First, let’s discuss workers compensation wage loss benefits. The quick and easy answer is — workers compensation wage loss benefits are NOT taxable at either the federal or state level. It is tax free income. You can read much more detail in this IRS publication.

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.

Since Pennsylvania’s work injuries are governed by the Workers Compensation Act, then income derived from workers compensation is exempt at the federal level.

Same goes for Pennsylvania state taxes. Again, you can dive into more details by reading about detailed income from the PA Department of Revenue.

Workers Compensation: Workers compensation is never taxable for Pennsylvania personal income tax purposes.

Now, what about lump sum settlements? You settled your case and received a lump sum settlement to end your workers compensation claim. It makes no difference. Workers Compensation benefits are exempt from taxes.

Social Security Disability can be taxable at the Federal level

OK, so what about social security disability (SSD) benefits? Well, that is a bit different. SSD benefits CAN BE taxable income.  It is a bit more complicated.  Although most SSD benefits recipients likely do not pay income taxes, that does not mean ALL do not.

Here is the general rule — if you or your spouse have another source of substantial income, it’s likely then that your SSD benefits could very well be taxed at the federal level. When you file, if your income as an individual is more than $25,000 per year but less than $34,000, you would have to pay taxes on about half your SSD benefits that were paid out during the year.

If you are married and file jointly, then the limit is increased to $32,000 before having to pay taxes on half of your SSD benefits.
What happens if you are single and make more than $34,000 per year? Well, then you could be taxed on 85% of your SSD benefits received. These SSD benefits are taxed at your marginal tax rate.

If you receive a lump sum SSD payment for back benefits, that lump sum payment can be subject to taxation for that year, and could move you into a higher income tax bracket for that year, which increase the amount of tax you pay.

Are SSD benefits subject to state income taxes? No, they are not. No social security income is taxable in Pennsylvania.

The taxation information provided here is not professional tax advice. If you have any taxation questions or concerns, you should consult with a tax expert.

Count on Mooney

Our legal team has decades of experience in complex workers compensation and social security disability. We stand ready to assist you in your time of need and you know you can Count on Mooney, whatever your legal need.

Mooney & Associates has 15 offices spread throughout Central Pennsylvania including:

We can meet you at the office location most convenient for you. Contact us today for a free consultation or call us at 717-632-4656 or toll free at 877-632-4656.

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