Important: We updated this article in December 2024 after reviewing current laws and IRS policy on the tax implications for those receiving workers’ compensation benefits. If you collect a workers’ compensation benefit, you may have questions about your taxable wages. One of the most important questions – and one you’ll need to ask yourself every year – might be “Is workers comp taxable?” The good news is that, no, you probably won’t pay taxes on workers’ compensation payments. However, if you get workers’ compensation benefits in addition to Social Security disability payments, then you may owe some taxes. It can also depend on the federal or state level tax liability laws where you live.
Keep reading to learn when state and federal governments may tax workers’ compensation for people who receive Social Security disability.
Will You Pay Taxes on Workers’ Compensation: Key Takeaways
- Is workers’ comp taxable income? Generally, no. But if you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), then you may owe taxes.
- In most cases, you do not have to report any workers’ comp payment on your tax return. But some states may tax a portion of your workers’ compensation benefits, in certain circumstances.
- Collecting both workers’ comp and SSI or SSDI benefits? Then your combined payments cannot equal more than 80% of your income before your injury forced you to stop working.
- Regular Social Security retirement benefits can reduce any workers’ compensation lost wage payments you still receive in certain states. In others, however, your workers’ compensation benefits stop as soon as you start drawing retirement income from Social Security.
Understanding Workers’ Compensation Benefits
Is Workers’ Comp Taxable Income According to the Internal Revenue Service (IRS)?
As far as the IRS is concerned, no, your workers’ compensation benefits are not taxable. If this seems strange – after all, you’re receiving money – the federal government doesn’t define workers’ compensation as taxable income. Why? Because workers’ comp is a stop-gap that replaces only a portion of your income until you can return to work.
The exception to this rule is if you also get Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). If that’s the case, then you may pay federal taxes on your workers’ comp payments.
Further, your combined benefits cannot exceed 80% of your income before you started collecting workers’ compensation.
What About a Lump-Sum Settlement? Do I Need to Report That to the IRS?
No, you do not, though you may need to report it to the Social Security Administration if you get SSI or SSDI benefits. This is because large workers’ comp payouts may push you over the income or asset limit for SSI benefits. In addition, any monthly income above $1,620 for 2025 may make you ineligible for Social Security disability income from SSDI.
Do I Need to Report My Workers’ Comp Benefits on Federal or State Income Tax Forms?
The answer to this question is also no. You do not have to report your workers’ comp benefits on your tax return. That answer applies whether you file federal, state, or both types of income tax forms every year.
What to Know About Social Security Disability and Workers’ Compensation Payments
If your workers’ compensation and disability benefits equal more than 80% of your pre-injury earnings, you’ll owe taxes on the difference. This is called an offset amount.
Here’s an example:
Before your injury, you earned $100,000 annually at work. Now, you get $50,000 per year in workers’ compensation. You also get $40,000 per year in SSDI payments. That’s $90,000 total, but the workers’ comp offset rule says you can only get $80,000 in benefits. This is because 80% of $100,000 is $80,000.
That also means the extra $10,000 you receive in workers’ compensation pay counts as taxable income to the IRS. So, you will owe taxes on that $10,000, but not the other $80,000 you currently receive in combined monthly benefits.
Can I Draw Social Security Retirement and WC Benefits at the Same Time?
The same formula for Social Security benefits applies here. About 50% of people who get Social Security payments owe taxes, according to the Congressional Research Service.
How much might you potentially owe in taxes on Social Security benefits if you also receive workers’ compensation? Here’s how the formula works:
| If the provisional income amount on your tax return is… | Filing taxes as single or head of household | Married, filing taxes jointly | % of your Social Security benefit that’s taxable income is… |
| Less than $25,000 | Less than $32,000 | 0% | |
| $25,001-$34,000 | $32,001-$44,000 | 50% | |
| $34,001+ | $44,001+ | 85% |
This offset rule applies only to federal disability benefits. So, if you get short-term or long-term disability from your employer as part of your benefits package, no offset applies. That’s also true if you’re getting STD or LTD benefits from a pension program, not the federal government.
The reason most people don’t have to worry about the offset rule is time. Workers’ comp benefits replace some of your lost wages when you cannot work. Eventually, you should heal and get back to work again at your normal job wages.
But the offset rule will apply to you if:
- You’re already drawing regular or early retirement from Social Security when your work injury occurs.
- You cannot return to work at your previous income level for life after your workplace accident.
- You become eligible for Social Security while drawing workers’ comp in a state that lets you receive both payments.
Important: The state where you work has its own unique laws that govern workers’ compensation payments and program rules. However, federal employees and those exempt from workers’ compensation insurance coverage may have different rules. Working with a tax professional in your state can help you minimize any money owed in federal and state taxes.
Is Any of My Workers’ Comp Tax Deductible at Either the State or Federal Level?
No, you cannot deduct workers’ comp benefits on your state or federal income taxes. That also applies to lump-sum workers’ comp settlements or structured payments for disfiguring injuries.
What you probably can do, though, is deduct medical expenses not otherwise covered by your workers’ comp benefits.
Pro Tip: It’s best to work with a tax preparer in your state who can advise you on this issue if you have any concerns.
Get a Free Consultation Now
If you’re still asking questions like “Are workers’ compensation benefits taxable income if I’m a federal employee?” or “Is workers’ comp taxable if I’m self-employed or a contractor? Do these income tax rules apply to me, too?” We want to help you get those answers!
Your first step should be to sign up for a free, no-obligation workers’ compensation claim evaluation now. An attorney specializing in workers’ compensation law near you will call to review your case. You can explain your current situation and get confidential answers that apply only to you.
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This service is always free, and we’ve helped thousands of people with a work-related injury or illness. If you choose to work with an attorney, you owe $0 in legal fees unless that lawyer helps you win. And if you do win a settlement, then you’ll only pay one small fee afterwards. The average fee nationwide for a successful workers’ compensation claim is about 15% of your final lump-sum payment.
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Lisa Allen is a writer and editor who lives in suburban Kansas City. She holds MFAs in Creative Nonfiction and Poetry, both from the Solstice Low-Residency Program in Creative Writing at Pine Manor College. Prior to becoming a writer, Lisa worked as a paralegal, where she specialized in real estate in and around Chicago.
