Social Security Benefits and a Workers Comp Offset

Social Security benefits can be paid to disabled workers. Such benefits are taxable in the same manner as Social Security benefits paid to retirees. In some cases, the benefits received are reduced by workers’ compensation benefits that are paid on account of disability. The reduction in Social Security benefits for the workers’ compensation benefits does not reduce the taxable portion of the Social Security benefits.

In one recent case, a worker in Ohio became disabled and was given Social Security disability benefits of $11,947. However, the actual amount of benefits received was reduced by $4,715 as an offset for the workers’ compensation that he received and $1,388 for Medicare Part B. He reported only $5,844, representing the Social Security benefits he was paid, which meant that none of the benefits were includible in gross income. The IRS said that the full $11,947 should have been taken into account, which meant that 85% of his benefits were includible in gross income.

The disabled worker argued that because workers’ compensation benefits are tax free, the portion of Social Security benefits not paid to him because of the workers’ compensation should also be tax free. The Tax Court disagreed because of specific language in the tax law, which says that if any Social Security benefits are reduced because of the receipt of a benefit under workers’ compensation, the term “Social Security benefits” includes that portion of the benefit received under workers’ compensation that equals the reduction. In effect, the full amount of Social Security benefits, whether paid to a taxpayer or received in the form of workers’ compensation, must be taken into account.