Obtaining a workers’ compensation settlement can be a time of relief and excitement as an injured employee in Texas. With the money you need to pay off your medical bills and replace lost income finally in your account, you and your family may have peace of mind as you look toward the future. Come tax time, however, you may encounter another issue – determining whether your workers’ compensation settlement is taxable.
For the most part, you will not have to list workers’ compensation settlement money as income when filing your taxes. You will typically not have to pay taxes on a workers’ compensation settlement at the state or federal level in Texas. Texas law does not deem compensatory damages awarded for bodily injuries – including workers’ compensation settlements – as taxable income, with a few exceptions.
When an insurance company gives an employee compensation for an occupational injury or illness under Texas’ workers’ compensation statute, the amount received is nontaxable. The same is true for a surviving family member who receives workers’ compensation benefits for the death of a loved one on the job. Workers’ compensation settlements are also tax-exempt under federal law.
If you also qualify for Social Security benefits, however, such as supplemental income or disability compensation, you may have to pay taxes on a portion of your workers’ comp settlement. The government will reduce your benefits from the Social Security system. The difference your workers’ compensation check creates will be taxable. The taxable amount is typically small, however.
You may have to pay taxes if you add half of your Social Security benefits to your other income and the amount comes to more than $25,000 for a single tax filer, $32,000 for a married tax filer or $0 for a couple that is married filing separately who lived together during the year. In these situations, the federal government will require you to pay taxes on the full amount of your Social Security income, even if your workers’ compensation settlement reduced your benefits.
Texas is the only state that does not have a law requiring workers’ compensation insurance. If you resolve your workplace injury claim through another outlet, such as a civil lawsuit, you may have to pay federal taxes on part of the award received. In general, you will have to pay taxes on any portion of your settlement or jury verdict given as punitive damages, but not bodily injuries or physical sickness compensation.
Any financial recovery you obtain for medical bills is nontaxable unless you deducted what you spent in medical care in the previous year. You cannot list medical payments as a deduction one year and then keep 100% of the money won in a settlement without paying taxes on it in another year. Any money you receive for pain and suffering will also be nontaxable as long as you also recover compensation for physical injuries. A settlement for emotional distress only will be subject to taxation under federal law. A personal injury lawyer can help you structure the settlement or verdict received through a civil lawsuit in a way that minimizes your tax responsibility.
The information here is not legal advice. Each injured worker’s situation is unique. It is critical to contact a Texas workers’ compensation attorney who can give you legal advice as to the taxation of your settlement award. Otherwise, you could end up keeping money you lawfully owe the Internal Revenue Service (IRS). Getting into debt with the IRS could lead to serious penalties such as late fees, fines and even tax fraud charges. Work with a lawyer during your workers’ compensation claim from the beginning to make sure you obey relevant tax laws and understand which portion of your settlement might be taxable.