Are Workers’ Compensation Benefits Taxable in Alabama?

Congratulations! Your workers’ compensation claim has been approved. You sit down at the table to open your 1st check but hesitate when a nerve-wracking question suddenly enters your mind:

Do I have to pay taxes on my Alabama workers’ compensation benefits?

Don’t worry. In most cases, your workers’ compensation benefits aren’t taxable. However, as is always the case when it comes to the law, there’s no one-size-fits-all answer to this question.

Let’s take a closer look.

What is workers’ compensation?

Workers’ compensation is a form of insurance that provides financial benefits to workers who are injured on the job.

Workers’ compensation is a no-fault insurance system, which means injured workers can receive benefits regardless of who’s at fault for their injury. An injured worker simply needs to establish that their injury arose out of their employment.

The Alabama Workers’ Compensation Act requires almost all employers who regularly employ 5 or more employees (full or part-time) to have workers’ compensation coverage.

Injured workers can receive the following workers’ compensation benefits:

• Reasonable and necessary medical expenses (surgery, physical therapy, follow-up visits, etc.)
• Wage loss benefits
• Death benefits for certain dependents

Wage loss benefits are intended to compensate you for the lost wages caused by your injury (whether you’re unable to return to work at all, unable to return to work for a period of time, or unable to return to the same type of work).

Wage loss benefits are calculated according to the nature of the injury but are typically limited to two-thirds of your average weekly wages (subject to a statutory maximum) for a certain length of time.

In most cases, you’ll begin receiving wage loss benefits about a month after your workers’ compensation claim is approved.

Are my workers’ compensation benefits taxable?

The good news is that workers’ compensation benefits aren’t typically taxable at the state or federal level. To put it another way, the monthly wage loss payments you receive are not considered taxable income.

Additionally, payments made to survivors (in the event a worker dies as a result of their workplace injury) are not taxed.

There is one notable exception to the general rule that workers’ compensation benefits are not taxable.

A portion of your workers’ compensation benefits may be taxed if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).

In Alabama, if you receive workers’ compensation and SSDI or SSI benefits, the total amount of these benefits cannot exceed 80 percent of your average earnings before you were injured. If the total amount exceeds 80 percent, the excess amount will be deducted from your Social Security benefit. You will then be taxed on that deducted amount (assuming your total income is high enough) at the federal level.

Let’s take a look at an example:

Before you suffered your work-related injury, you made $4,000 per month. You’re entitled to receive $2,200 in SSDI and $2,000 in workers’ compensation benefits. The total amount you receive ($4,200) is more than 80 percent of your average earnings before you were injured, which would be $3,200. As a result, your SSDI will be reduced by $1,000, and you will be taxed on that $1,000.

Keep in mind that in many cases, your “income” won’t be high enough to be taxed at the federal level. To make sure you’re not paying taxes when you don’t need to be or failing to pay taxes when you should be, speak to an experienced Alabama workers’ compensation attorney.

Is compensation received from a 3rd-party lawsuit taxable?

Workers’ compensation is an exclusive remedy, which means that in most cases, you’re not allowed to file a lawsuit against your employer or colleague if you’re injured at work.

However, if your injury was caused by a 3rd party (someone other than your employer or colleague), you can file a personal injury lawsuit against the 3rd party in addition to a workers’ compensation claim.

The general rule is that compensatory damages for injuries are not taxable at the state or federal level in Alabama. The reasoning behind this is that personal injury awards aren’t considered “income,” but rather compensation for something you lost.

Keep in mind that filing a 3rd-party claim may impact the amount of workers’ compensation benefits you can recover.

If you have questions about your workers’ compensation benefits or the tax consequences of those benefits, don’t hesitate to reach out to an Alabama workers’ compensation attorney. Most initial consultations are free.