Workers’ Comp and Taxes: What Injured Workers in Vermont Need To Know

After a workplace injury, many Vermonters rely on workers’ compensation payments to stay financially afloat. As tax season approaches, many injured employees wonder whether they need to report or pay taxes on these payments. Knowing how these benefits are treated can help you avoid confusion and plan ahead.

Are Workers’ Compensation Benefits Taxable?

In Vermont, workers’ compensation payments are typically exempt from both state and federal income tax. This exemption applies to both weekly wage replacement benefits and lump-sum settlements. Since these payments are designed to help injured workers during their recovery rather than act as regular earnings, they are not included in taxable income.

As a result, you typically do not need to report these benefits on your tax return. You also won’t receive a W-2 form for workers’ compensation income, since it is not classified as wages. However, while these payments are not taxed, they may still be considered unearned income. This means that workers’ compensation payments can affect eligibility for certain Vermont tax credits, such as housing-related benefits.

What About Personal Injury Settlements?

If your workplace injury also resulted in a personal injury claim, most settlement awards are generally not taxable either. Compensation for medical costs, pain and suffering, and diminished earning capacity is usually excluded from income.

However, there are exceptions. Certain parts of a settlement may be taxable if they are designated for lost wages, punitive damages, or medical expenses that were previously deducted. Each situation is unique, so it’s advisable to review settlement details closely with a tax professional.

Social Security Disability and Workers’ Compensation

Things can become more complex if you receive both workers’ comp benefits and Social Security Disability Insurance (SSDI). Workers’ compensation payments can reduce (or “offset”) your SSDI benefits. The offset amount may then be subject to tax. In such cases, you may receive a tax form reflecting income that was offset rather than actually paid out, which can be confusing.

Due to these overlapping regulations, workers who receive both types of benefits should exercise caution when preparing their taxes. It is highly advisable to consult an attorney who understands both workers’ compensation and SSDI claims. A skilled attorney can help you structure your workers’ comp settlement to reduce the offset and maximize how much you get to keep.

Key Takeaways

For most injured workers, the tax implications of benefits are clear:

• Workers’ compensation benefits are not subject to tax and do not need to be declared as income.
• Most personal injury settlements are also tax-exempt, with a few exceptions.
• Social Security Disability benefits may be partially taxable depending on the circumstances.

Practical Tips for Tax Season

Even though workers’ compensation benefits are generally not taxable, staying organized during tax season is still vital. Keep detailed records of all payments and claim-related documents. While you won’t report these benefits as income, proper documentation can help if questions arise. If you received other income, such as SSDI or a personal injury settlement, review each carefully, since different tax rules may apply. Additionally, pay close attention to any tax forms you receive to avoid filing mistakes.

If your situation involves multiple benefits, it’s wise to consult a tax professional or attorney. They can help clarify what, if anything, must be reported and ensure accuracy.

Contact Us for Legal Help

If you have questions about your workers’ compensation benefits, contact an experienced Vermont workers’ comp attorney at Sluka Law PLC today.

Source:

ssa.gov/disability#:~:text=Social%20Security%20Disability%20Insurance%20(SSDI)%20or%20%E2%80%9CDisability%E2%80%9D%20provides%20monthly%20payments%20to%20people%20who%20have%20a%20disability%20that%20stops%20or%20limits%20their%20ability%20to%20work.