How Can An Employee’s IRS Problems Can Grow Worse After A Workers’ Compensation Injury

Most workers realize workers’ compensation benefits are not taxed on a federal or state basis. This does not mean, however, that a worker on compensation will not run into problems. What follows can devastate a family and delay physical recovery; therefore, employers should be prepared to assist a worker who will be out of work even for relatively short periods.

Most workers realize that compensation benefits are not taxed on a federal or state basis. This does not mean, however, that a worker on compensation will not run into problems. What follows can devastate a family and delay physical recovery; therefore, employers should be prepared to assist a worker who will be out of work even for relatively short periods.

A comp injury can cause tax problems in two ways:

1. It can cause income disruption during a time when the employee is trying to pay tax obligations from prior years.

2. The employee may have unexpected tax liabilities due to the fact that Social Security disability benefits, when combined with other sources of income, may become taxable.

3. In addition, there is an unpleasant surprise, seldom encountered until recently, when a large award of workers compensation benefits is reversed by a court. What was untaxed comp become fully taxed ordinary income. Until recently, comp benefits – not being taxable – were not reported to IRS. Now, however, many carriers file a 1099 form when an award is reversed on appeal. Workers, however, are not likely to understand what will follow and find themselves with substantial tax liabilities, especially if they have a spouse with considerable earnings.

Converting tax free comp to fully taxed income occurs in the following sequence of events:

1. The NY comp judge awards comp.
2. The Board affirms the award on appeal.
3. The carrier appeals to the Appellate Division. However, the payments MUST continue to the worker while the appeal is in progress.
4. The court reverses the Board award.
5. The formerly tax free comp is now fully taxable income unless the worker voluntarily repays the award.
6. IRS is sometimes, but infrequently, notified of the court reversal and the change in tax status of the payments.
7. For thirty years, the Board has not required workers to repay. Instead, the carrier is reimbursed from a special fund which is funded by special assessments.
8. Court decisions and included documents are public records, making it easy for any person to locate situations where a worker now owes taxes to the IRS.
9. Persons notifying the IRS of such situations may collect substantial rewards.

Employers should make the business accountant aware that problems may arise and offer assistance. If the employer, employee and accountant cooperate with the IRS before problems escalate all will be a lot happier.

Author: Attorney Theodore Roncais a practicing lawyer from Aquebogue, NY. He is a frequent writer and speaker, and has represented employers in the areas of workers’ compensation, Social Security disability, employee disability plans and subrogation for over 30 years. Attorney Ronca can be reached at 631-722-2100.

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By: Anthony Van Gorp, private investigator with 25 years experience.

Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker about workers’ comp issues.

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