Is Workers' Comp Taxable?
Under federal tax law, workers' compensation paid for an occupational sickness or injury under a workers' compensation act or similar statute is generally not taxable. There are exceptions: pay for light duty after returning to work is taxable wages, retirement benefits based on age or service are taxable, and any part of workers' comp that reduces Social Security or equivalent railroad retirement benefits is treated as those benefits and may be taxable.
What the law says
- Amounts received as workers' compensation for an occupational sickness or injury are fully exempt from tax if paid under a workers' compensation act or a statute in the nature of a workers' compensation act. IRS Publication 525, Taxable and Nontaxable Income
- The exemption also applies to workers' compensation paid to survivors. IRS Publication 525, Taxable and Nontaxable Income
- The exemption does not apply to retirement plan benefits received based on age, length of service, or prior contributions to the plan, even if the person retired because of an occupational sickness or injury. IRS Publication 525, Taxable and Nontaxable Income
- If part of workers' compensation reduces Social Security or equivalent railroad retirement benefits, that part is considered Social Security (or railroad retirement) benefits and may be taxable. IRS Publication 525, Taxable and Nontaxable Income
- Pay received for light duties after returning to work following a workers' compensation claim is taxable as wages. IRS Publication 525, Taxable and Nontaxable Income
- For a disability pension paid under a statute covering only service-connected disabilities, part of the pension may be workers' compensation and exempt; the part based on years of service is taxable as pension or annuity income. IRS Publication 525, Taxable and Nontaxable Income
- Payments under the Federal Employees' Compensation Act (FECA) for personal injury or sickness are not taxable, but continuation of pay for up to 45 days while a claim is decided, and sick leave pay received while a claim is processed, are taxable. IRS Publication 525, Taxable and Nontaxable Income
- Form SSA-1099 shows amounts by which Social Security benefits were reduced because the person received workers' compensation, and substitute workers' compensation benefits are taxable to the same extent as Social Security benefits. IRS, Topic No. 423, Social Security and equivalent Railroad Retirement benefits
- Box 3 of Form SSA-1099 lists any workers' compensation offset, and the IRS says box 5 (net benefits) should not be reduced by that offset when figuring whether benefits are taxable. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
FAQ
Do I report workers' comp benefits as income on my federal return?
Generally no. Workers' compensation for an occupational sickness or injury paid under a workers' compensation act or similar statute is fully exempt from federal income tax.
Is my pay taxable if I go back to work on light duty?
Yes. Pay for light duties after returning to work following a workers' compensation claim is taxable as wages.
Can workers' comp become taxable because of Social Security disability?
Yes, in part. If workers' comp reduces your Social Security or equivalent railroad retirement benefits, the amount of the reduction is treated as Social Security benefits and may be taxable under the rules for those benefits.
Are survivor workers' comp benefits taxable?
No. The exemption applies to workers' compensation paid to survivors.
Is a retirement pension taxable if I retired because of a work injury?
Retirement plan benefits based on age, length of service, or prior contributions are not covered by the workers' comp exemption, even if you retired because of the occupational injury.
Related
- Slipped and Fell at Work: Workers' Comp or a Lawsuit?
- What Is Workers' Compensation?
- Workers' Compensation by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.