One of the main situations where taxation comes into play is when a person receives both workers’ compensation and Social Security Disability Insurance (SSDI) benefits. In this case, a portion of the combined benefits may become taxable.

This is because of a rule known as the "workers' compensation offset." If your combined SSDI and workers' compensation benefits exceed 80% of your average current earnings before you became disabled, then the excess amount may reduce your Social Security benefit. That reduced amount could then become taxable. While this doesn’t apply to everyone, it’s an important detail for people who qualify for both types of benefits.

Another scenario where taxes could be involved is if a person returns to work in a limited or part-time role while still receiving some form of workers’ comp. In this case, the wages earned from working again are taxable, just like any regular income. However, the workers’ compensation portion of their income remains non-taxable.

Lump-Sum Settlements and Taxes

Some workers may choose or be offered a lump-sum settlement for their injury instead of ongoing weekly payments. These lump sums are usually not taxable either. However, how the settlement is structured matters. For instance, if the settlement includes money specifically allocated for lost wages covering a certain period of time, and the individual returns to work during that time, the IRS may view some of those funds as taxable wages.

It’s crucial to work with a lawyer or tax professional when negotiating a settlement to ensure it is structured in a tax-efficient way. A poorly planned settlement could result in unexpected tax liabilities down the road.

Tips to Stay on the Safe Side

Even though most workers’ compensation benefits are non-taxable, it’s always a good idea to:
● Keep detailed records of all payments you receive, including any documentation about the nature of the benefits.
● Talk to a tax professional if you’re unsure whether your situation might fall under one of the exceptions.
● Stay informed about IRS guidelines and state laws, especially if you’re receiving SSDI in addition to workers’ comp.

Final Thoughts

For most people, workers’ compensation benefits are a tax-free form of support while they heal from a job-related injury or illness. This is especially true in Florida, where the lack of state income tax adds an extra layer of protection.

However, special cases—like receiving SSDI or returning to part-time work—can affect whether part of your benefits become taxable. Always consult with a professional if you're unsure. Being informed can help you avoid surprises and make smart financial decisions as you focus on your recovery.

Need Help Navigating Your Workers' Compensation Claim?

At Juan Lucas Law Firm, we’re here to guide you every step of the way. Whether you're filing a new claim, negotiating a settlement, or just have questions about your benefits, our team is ready to help.