Workers’ compensation settlements are usually not awarded in lump sum payments but monthly or one-time payments. If you receive a settlement or award in the form of an annuity, it’s important to understand how disability income will be treated under workers’ compensation. First, it’s worth noting that everyone with workers’ compensation benefits must meet the definition of “disability” listed by the Social Security Administration (SSA).
If you aren’t permanently disabled, your workers’ comp payment will not be treated as income while you are receiving it. In other words, if you have a settlement or annuity with a guaranteed payment for a certain period, your workers’ compensation benefits will not be counted as income for those same payments.
Just like income taxes increase if you pay benefits for too long, the Social Security Administration (SSA) will start taking your disability benefit payments from another source of income. They’ll look to see how much money you received from workers’ compensation before they start seeing it on your tax return.
Why Is Disability Income Treated Differently?
Social Security provides disability income to those who are federally approved disabled. The definition of disability is a particular set of circumstances that make the recipient unable to perform any work. Social Security can deny a person’s claim for disability benefits if their level of disability prevents them from doing any job in their region, but not necessarily all jobs in the U.S. Workers’ compensation, on the other hand, awards benefits based on your current level of impairment and your inability to work as a result. It’s not a disability but rather damage to your body that prevents you from working.
The problem is that during your disability, you’re still allowed to work. While you’re on workers’ compensation, you can find work so long as your work doesn’t aggravate or cause a recurrence of your injury or impairment. However, the SSA will treat these payments as income if you get a settlement or annuity that allows for one-time payments (like an equity release on the house). Thus, the payments will be taxed and deducted from any other benefits you would have received without this settlement or annuity.
How to Claim Workers’ Comp Income
To claim workers’ comp income, you’ll need to fill out your tax return like normal. However, there are a few key differences in taxes since you cannot work while receiving your disability payment through workers’ comp. As with any other income, you will be taxed on your workers’ compensation settlement or annuity. The only catch is that the payments won’t be counted as income until they stop being paid. You can calculate how much tax you’re due by referring to your 1040 tax form.
Ways you can get disability after workers’ comp settlement.
Apply to the Social Security Administration (SSA).
If you are injured at work and know that your disability will last for a long time, it’s worth applying to the SSA for disability benefits. The SSA uses a much broader definition of disability than workers’ compensation. You’ll need to report any workers’ compensation payments if you apply. You also have a statutory right to appeal any adverse decisions by the SSA, whereas decision-making with workers’ comp is more subjective.
Apply for Social Security Disability Insurance (SSDI).
If you cannot work due to disease, mental condition, or other impairment that prevents you from working, you can apply for Social Security Disability Insurance (SSDI). SSDI is an insurance program available through Social Security that pays a portion of your income if you’re disabled. Unlike workers’ compensation, you cannot get disability benefits from workers’ comp and then apply for SSDI simultaneously. You must choose one or the other.
File a claim for Supplemental Security Income (SSI).
Supplemental Security Income is a government benefit paid to people who don’t meet the definition of disability set by the SSA. However, Supplemental Security Income is still a form of payment available to those who cannot work due to their disability. If you’re disabled and receive workers’ comp payments, you can file a claim with the SSA for SSI benefits. You cannot get SSI at the same time as receiving workers’ comp payments, and you will not have to wait for a decision on your application for SSDI before filing your claim for SSI benefits.
Get on disability with the Veterans Administration (VA).
Veterans who have received their disability rating from the VA can apply for disability benefits. However, this option will only be available if you cannot perform most jobs in your state. Benefits are provided as a monthly benefit, which is paid out until you can work. The VA will not pay a lump sum as you would through workers’ comp.
Get disability from an employer who ERISA covers.
Some employers are covered by ERISA and are responsible for paying disability benefits to injured employees, such as retirement plans and 401(k)s. If you’re injured on the job and receive workers’ compensation benefits, you may be able to get back pay from your employer or be released from your job. Your employer will have to make payment within 30 days of your request. Once you are officially released, you’ll be able to continue receiving workers’ compensation benefits.
Get disability with the Railroad Retirement Board (RRB).
Railroad Retirement Board is a federal agency responsible for providing financial benefits (in the form of a monthly benefit) to those who are disabled and unable to work in the railroad industry. Unlike other forms of disability pay, RRB pays out based on your current level of impairment. This means that you won’t lose your check if your condition improves, but it won’t increase either if you return to work as long as your condition hasn’t worsened since returning to work.
Get disability from a private insurance provider.
Unusually, private insurance companies are responsible for paying disability benefits to workers who cannot work due to their injury or illness. However, these companies do not provide payments based on your current level of impairment. Instead, they use a case-by-case basis to determine whether you’re able to perform your job or not. Insurance companies will usually pay out benefits within a few days of your request without further processing by you or the SSA. Most companies are also unable to deny a claim for disability because of any evidence of fraud or intentional misrepresentation.
Get disability from the state government.
In some states, the government provides services in the form of welfare programs to those who are unable to work due to injury or illness. However, these programs do not provide monthly payments like the private insurance companies listed above. In most cases, you will receive a lump sum payment at the end of your stay on disability.
Get disability from a private health insurer (like Aetna).
Many private health insurers offer disability benefits that can be paid out by them or through another third-party administrator (TPA). The benefit amount and payment schedule are determined by your TPA and can be paid out to you through an insurance company. Premiums are typically lower than comparable policies through employers or the state government.