Do I Have to Pay Taxes on Workers’ Comp Benefits?
If you’re receiving workers’ compensation benefits after a job-related injury or illness, you might be wondering: Do I have to pay taxes on this money?
The short answer is: In most cases, no. Workers’ comp benefits are generally not taxable at the federal or state level. But as with many tax questions, there are exceptions and important nuances to be aware of.
Workers’ Comp Is Usually Tax-Free
Under the Internal Revenue Code, benefits received under a state workers’ compensation law are exempt from federal income tax if they are paid because of a work-related injury or illness. This includes:
- Weekly wage replacement payments
- Permanent or partial disability benefits
- Medical expense coverage
- Lump-sum settlements
Most states also follow this federal rule, meaning you typically won’t pay state income tax either.
When Workers’ Comp Can Become Taxable
There’s one main exception: when you’re also receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).
If your workers’ comp benefits cause your total Social Security benefits to be reduced (called an “offset”), then the portion of workers’ comp that replaces the offset may be taxable.
Example:
If your combined SSDI and workers’ comp benefits exceed a certain limit, the Social Security Administration may reduce your SSDI. The amount they reduce it by can be treated as taxable income, even though it’s technically from your workers’ comp.
Lump-Sum Settlements and Taxes
If you receive a lump-sum settlement instead of weekly payments, the same tax rules apply—it’s still generally not taxable. However, how the settlement is structured matters. If it includes any payments labeled as back wages or punitive damages, those portions could be taxable.
Having a tax-savvy attorney or advisor structure the settlement can help minimize potential tax consequences.
What About Retirement Benefits?
If your injury leads you to retire and you receive pension payments or 401(k) distributions, those are separate from workers’ comp and may be taxable. It depends on the source of the funds and how contributions were originally taxed.
Bottom Line
For most people receiving workers’ comp, the benefits are not taxable. But if you’re also getting Social Security or negotiating a lump-sum settlement, you could face tax implications on certain portions.
Need legal help? In California, navigating legal challenges, whether they involve personal injury, workers’ compensation, criminal defense or civil litigation, can be overwhelming. Khoury Law Group is here to provide the critical legal support you need. As a leading advocate for individuals facing legal battles, our experienced attorneys understand the complexities of the legal system and are committed to fighting for your best interests. With personalized legal strategies and compassionate support, we are dedicated to achieving the justice and compensation you deserve.
CONTACT US FOR HELP. Call us at (888) 354-6879 or fill out the form on our Contact page.
