Have you been wondering, are worker’s compensation benefits taxable in California? If so, then this article will explain that in most cases these benefits are not taxable, but there are some exceptions as described below.

Obligation of employers and what it covers

It is the obligation of employers in California to ensure that they possess workers’ compensation insurance in such a case their employee should suffer an injury or illness on the job. Worker’s Compensation benefits include medical treatment, temporary disability benefits when you are unable to work, mileage covering your expense travelling to doctors appointments, death benefits and permanent disability payments when your case settles. These types of benefits can be vital when someone is injured and unable to work. These benefits were created by the California legislature with the purpose of treating injuries and providing income while an injured worker recovered from his or her injuries. Also, California worker’s compensation provides vocational rehabilitation benefits when an injured worker is unable to return to his or her job because of a work injury. it is able to cover the costs of retraining the worker if the person must acquire a different position or a different type of work. California worker’s compensation does not provide benefits for pain and suffering.

Worker’s Compensation benefits are non-taxable in most cases

Per the Internal Revenue Code U.S.C., 6334 workers’ compensation benefits are not taxable. That code section states: “There shall be exempt from levy…any amount payable to an individual as workmen’s compensation law of the United States (or) any State.” This language means that California workers’ compensation benefits are not taxable income to the employee. The employer should not deduct taxes from any workers’ compensation temporary disability payments or permanent disability payments paid to the employee, and the employee does not owe any employer payroll taxes on payments of temporary disability or any other workers’ compensation benefit. Temporary disability benefits are two-thirds of an employee’s gross wages, so the idea is that the payment would reflect employees’ take-home pay before they were injured. That is why worker’s compensation benefits generally are not taxed.

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Public employee benefits

For public employees entitled to receive as much as a year of salary “in lieu of” temporary disability payments under California Labor Code 4850, the California Supreme Court has stated that such payments are not salary, but workers’ compensation benefits. But the worker’s compensation appeals board has decided that an employer is allowed to withhold taxes from a leave of absence benefits paid to an injured employee under Labor Code 4850. The worker’s compensation courts believed that the employer was responsible for continuing payment of the applicant’s salary in the same manner as it was paid before the disability. Furthermore, the appeals board did not believe that it was the employer’s responsibility to determine the extent of withholding and deduction from that salary, based on the taxable nature of the income. Instead, it indicated that the applicant’s tax liability was his own responsibility, and he could adjust the tax withholding by submitting a new W-4 from the employer. According to the appeals board, the applicant was not being denied any of the salary owed by the employer withholding taxes, although he would have to seek a refund from the IRS.

Taxes can arise if you are receiving SSDI benefits

In the event that you are receiving worker’s compensation permanent disability benefits and federal social security disability insurance (SSDI) at the same time, a tax situation can arise. In California if you are receiving benefits through both Social Security Disability Insurance (SSDI) and workers compensation permanent disability benefits, and those combined benefits are more than 80% of your average earnings before you became disabled, the SSDI benefits will be reduced (or “offset”). The offset doesn’t apply to Social Security retirement benefits.

Taxes may become an issue if there is an offset because your worker’s compensation benefits would cause your income to be too high. If SSDI were to reduce your monthly benefits because of the monies you were receiving in permanent disability benefits from worker’s compensation that amount could be subject to taxes at the end of the year.  The reason for this rule is that the offset amount could have been taxable if you had received it from Social Security rather than through workmen’s compensation.

For example, say you would have been entitled to $1,000 in SSDI benefits and $1,000 in workmen’s compensation disability benefits, for a total of $2,000 per month. If your pre-injury earnings were $1,800 per month, the combined benefits would be more than 80%. That means that your SSDI would be reduced by $400 (to bring the combined benefits down to 80% of $2,000, or $1,600). In that case, $400 of your monthly workers’ compensation benefits could be subject to tax if your total income is high enough.  Because of the complexity of this issue, it is important that you contact a Riverside worker’s compensation lawyer to help minimize any tax exposure.

When in doubt seek the help of a lawyer.

Because of the complexity of the interplay between SSDI benefits worker’s compensation and permanent disability benefits, it is important that you seek the help of a Riverside worker’s compensation lawyer. At the time of settlement of a case, there are ways an experienced attorney can structure a settlement to avoid taxes or reduce them greatly.