Is My Workers’ Comp Taxed?
Workers’ compensation provides financial support if you are injured or become ill due to your job. A common concern among employees is whether workers’ compensation benefits are taxable. In most cases, workers’ comp is not subject to federal or state income tax, but there are a few important exceptions to understand.
General Rule: Workers’ Comp Is Not Taxable
Under federal law, workers’ compensation benefits are not considered taxable income if they are paid due to a work-related injury or illness. This includes payments meant to replace lost wages or cover disability.
In most states — including Texas — workers’ compensation benefits are also exempt from state income taxes. This means injured workers typically receive their full benefit amount without tax deductions.
What Types of Workers’ Comp Benefits Are Tax-Free?
The following benefits are generally not taxed:
Wage Replacement Benefits
Payments that replace a portion of your lost income while you recover from a work-related injury are typically tax-free.
Disability Benefits
Temporary or permanent disability payments provided through workers’ compensation are not taxable.
Medical Benefits
Workers’ comp payments covering medical bills, rehabilitation, prescriptions, and related healthcare costs are not considered income and are not taxed.
Death Benefits
Compensation paid to surviving family members after a fatal workplace injury is also not taxable.
When Can Workers’ Comp Become Taxable?
While workers’ comp itself is usually tax-free, it can become partially taxable in certain situations, including:
If You Also Receive Social Security Disability Benefits
If you receive both workers’ comp and Social Security Disability Insurance (SSDI), a portion of your benefits may be taxable if your total income exceeds IRS thresholds.
If You Return to Work or Receive Other Income
Workers’ comp benefits remain tax-free, but other income — such as wages, unemployment benefits, or retirement income — may still be taxable.
If Workers’ Comp Is Part of a Settlement
Most workers’ comp settlement payments are not taxed, but structured settlements involving wage replacement or third-party claims may have tax considerations.
What About Employer-Paid Benefits or Light Duty Pay?
If your employer offers light-duty work or supplemental wage payments, those wages are taxable because they are considered regular income, not workers’ comp benefits.
Should You Report Workers’ Comp on Your Tax Return?
In most cases, you do not report workers’ compensation benefits as taxable income on your federal tax return. However, if you receive combined disability or Social Security benefits, you may need to report certain portions depending on your income level.
Conclusion
For most injured workers, workers’ compensation benefits are not taxed, allowing you to focus on recovery without additional financial stress. However, situations involving SSDI, settlements, or additional income can affect tax obligations.
