Social Security, Settlements and Taxes - be Forewarned

Sunday, September 11, 2005 | 0

On occasion, users of the WorkCompCentral Forums post items of importance to the general population. Such an instance occurred with an injured worker from South Carolina recently involving the tax implications of receiving Social Security disability and a workers' compensation settlement.

While the general rule is that workers' compensation benefits are not taxable, our complex and often illogical tax laws may cause the receipt of ancillary benefits, such as Social Security Disability, to produce a "paper based" tax as the result of "phantom income."

The following post has been reproduced here, edited for grammar and readability:

QUESTION: I have won my workmans comp. case but my lawyer said that to prevent over payment that he is talking to my companies attorney to settle my claim using the Utica Mohawk Rule. What is this rule and does it benefit me? I am now drawing social security disability benefits and have disability insurance with Met Life but since I was injured on the job, I filed for workmans comp.

ANSWER: I was injured while working and ended up with back fusion surgery and implantation of a morphine infusion pump in my side for the unrelenting back pain after failed conservative care.

After surgery, I worked half days while trying to get back to full time.

I was told by my attorney that I should apply for Social Security disability. I worked for more than 25 years paying Social Security taxes so I applied.

I was approved for disability, but my benefit was cut by 2/3's as a result of the receipt of work comp benefits --but that isn't even the bad part.

South Carolina law and the U.S. Code of Laws state that workers' compensation is not taxable. When filing my taxes, I paid taxes on the Social Security disability I received. But I have now received a letter from the IRS stating I owe tax on part of the work comp benefits I received.

Everyone I spoke with said that was impossible since work comp is not taxable, but what I have finally discovered is that when Social Security cut my benefit by 2/3's, they are allowed to take credit for paying me that 2/3's as if they did pay me by charging off on paper that amount from my WC payments.

In other words, they were supposed to pay me $900+ a month. They only paid me $300+. They then are allowed to tax me for the $600 that they did not pay to me by taxing $600 of work comp benefits.

This is very bizarre that even though I found countless references to work comp being not taxable, they were able to do this.

For those who receive the exact same injury as the result of an auto accident, as long as their settlement papers state that the money is being paid as anything other than for wages, they will not pay one penny of taxes on that money and they will receive full Social Security disability benefits. It is only the injured worker who is unfairly discriminated against in this way.

For those of us unfortunate enough to have been injured while working, we receive unrelenting bad treatment from employers, attorneys, insurance companies, and our own government. I wanted to share the above information so that perhaps someone will benefit from it and be aware of the kind of rotten tricks that may be pulled on them once they get to the end of their cases. Perhaps by being forewarned, they may be able to avoid the pitfalls that got me.

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