Worker Repays $49,000 to SSA, Still Owes Back Taxes on $36,000

Frank Ferreri

Washington, DC (WorkersCompensation.com) – When it comes to workers’ compensation payments, not having a good handle on tax law could get expensive.

As worker learned in Hairston v. Internal Revenue Service, No. 8129-17S (T.C. 01/25/21), it could mean having to pay back $49,170 while at the same time owing taxes on $35,999.

Social Security, Workers’ Compensation

The worker received Social Security disability benefits and workers’ compensation benefits for a period, but when the latter stopped, his Social Security benefits increased.

In 2014, his benefits amounted to $28,276 for Social Security disability, with a $7,723 workers’ compensation offset. Nonetheless, the worker didn’t report receiving Social Security benefits on is 2014 tax return.

Two years later, the state’s workers’ compensation commission determined that it had erroneously terminated benefits, so it retroactively reinstated his workers’ compensation payments. In turn, the Social Security Administration required the worker to repay $49,170 in disability benefits, which he had “nearly finished” by the time the case went to court.

After SSA determined that the worker owed taxes on benefits he didn’t report in 2014, the worker countered that the Social Security benefits he received in 2014 weren’t taxable because he had to repay them several years later.

Tax Laws

Under 26 USC 451(a), an item of income must be included in gross income for the taxable year in which the taxpayer receives it unless the taxpayer’s accounting method requires recognition for a different taxable year.

The worker was a cash basis taxpayer, so under Section 1.451-1(a) of the Income Tax Regulations, he had to include the amount in gross income for 2014, the year in which he actually received the money.

This rule holds even if a taxpayer must later repay the amount. However, income may be reduced in the year for which repayment occurs, per 26 USC 1341.

Thus, the worker was required to report his Social Security benefits received in 2014 as income for 2014, and his later repayments didn’t affect his 2014 tax liability.

The tax court also explained that 20 CFR 404.408(c) maintains that if a taxpayer receives workers’ compensation benefits while also receiving Social Security benefits, the Social Security amount is reduced or “offset.” The offset amount is included in the total amount of Social Security benefits the taxpayer receives.

So, in the worker’s case:

  1. The SSA paid $28,276 to the worker in 2014.
  2. In the same year, $7,723 in Social Security benefits were offset because of workers’ compensation the worker received.

As a result, under 26 USC 86(d)(3), the worker was taxed as if he received $35,999 in Social Security benefits for 2014.

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