Most workers' compensation benefits are not taxable income at the federal level

The short answer: money you receive as workers' compensation for an injury or illness is generally not subject to federal income tax. The IRS treats these payments as a replacement for lost wages due to a work-related injury, not as income you earned. However, there are exceptions, and some states tax workers' comp differently than the federal government does.

The key distinction is between the core benefit—the payment for your injury itself—and any interest or penalties the fund may owe you. The injury payment is tax-free. Interest is not.

Key Takeaways

  • Federal tax law excludes workers' compensation payments from your taxable income, so you do not report them on your federal tax return.
  • If you receive interest on a delayed workers' compensation payment, that interest is taxable and must be reported separately.
  • A handful of states—including New Jersey, New York, and Wisconsin—tax workers' compensation benefits, so check your state's rules.
  • If you also receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), workers' comp may reduce those benefits even though it is not taxable.
  • Your workers' compensation insurer should send you a statement showing what portion of any payment is the benefit itself versus interest or other taxable amounts.

When interest on workers' comp becomes taxable

Workers' compensation payments are delayed sometimes. When they are, the fund or insurer may owe you interest on the overdue amount. That interest is taxable and must be reported on your federal return, usually on Form 1040 as miscellaneous income.

The interest rate varies by state and by how long the payment was delayed. Some states set a statutory rate (often 5 to 10 percent per year); others use a rate tied to Treasury bills or prime lending rates. Your workers' compensation statement should break out the interest separately from the benefit payment itself.

If you are unsure whether a payment includes interest, contact your state's workers' compensation board or your insurer and ask for an itemized statement. They are required to provide one.

State-level taxes on workers' compensation

Most states follow the federal rule and do not tax workers' compensation. But a few do. New Jersey, New York, and Wisconsin all tax workers' compensation benefits as income. If you live in one of these states, you will owe state income tax on your workers' comp payment.

Some other states tax workers' comp only under certain conditions—for example, only if you are also receiving unemployment benefits, or only if your income exceeds a threshold. A handful of states tax only the portion of the benefit that covers lost wages, not the portion that covers medical expenses.

Your state's workers' compensation agency or your tax department can tell you whether your state taxes these payments. If it does, your workers' compensation statement should show the taxable amount clearly, and you will report it on your state return.

How workers' comp affects other benefits you receive

Even though workers' compensation is not federally taxable, it can reduce other benefits you are receiving. Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) both have rules that reduce your monthly payment if you are also receiving workers' comp.

Under the workers' compensation offset, if your SSDI or SSI benefit plus your workers' comp payment would exceed a certain amount (usually around 80 percent of your average current earnings before the injury), Social Security will reduce your SSDI or SSI check. The workers' comp payment itself is not taxed, but it counts toward that offset calculation.

If you receive both workers' comp and SSDI or SSI, contact Social Security to understand how the offset applies to your specific situation. The reduction is not automatic in all cases, and some payments may be excluded from the offset calculation.

What your workers' compensation statement should show

Your workers' compensation insurer or your state's workers' compensation fund will send you a statement when you receive a payment. This statement should clearly separate:

  • The workers' compensation benefit itself (not taxable at the federal level)
  • Any interest on a delayed payment (taxable)
  • Any penalties or other amounts owed by the fund (taxable)
  • Medical expenses paid on your behalf (not taxable to you, but may affect your deduction for medical expenses)

If your statement does not break these out, ask for an itemized version. You need this information to file your taxes correctly, especially if you live in a state that taxes workers' comp or if part of your payment includes interest.

Reporting workers' comp on your tax return

For federal taxes, you do not report the workers' compensation benefit itself anywhere on your Form 1040. It is excluded income and does not go on any line.

If your payment included interest or other taxable amounts, report that on Form 1040, Schedule 1, as miscellaneous income. The amount should be shown on the statement your insurer sent you.

If you live in a state that taxes workers' comp, report the taxable amount on your state return according to your state's instructions. Your state tax department's website will have a form or worksheet for this.

What happens if you received workers' comp in a previous year

If you received workers' compensation in a prior year and did not report it (because you believed it was not taxable), you generally do not need to file an amended return for the benefit itself. The IRS does not tax it, so there is no error to correct.

However, if your payment included interest and you did not report that, you should consider filing an amended return for that year. The statute of limitations for amending a return is usually three years, though it can be longer if the underreporting was substantial. A tax professional can help you decide whether amending is necessary in your situation.

Frequently Asked Questions

Do I have to report workers' comp on my tax return at all?

No, not the benefit itself. The workers' compensation payment for your injury is excluded from federal taxable income and does not go on your return. If your payment included interest or penalties, those portions are taxable and must be reported on Schedule 1.

What if I received a lump-sum workers' comp settlement instead of ongoing payments?

The same rule applies. A lump-sum settlement for a work-related injury is not taxable at the federal level. However, if the settlement includes interest on delayed payments or covers something other than the injury itself (such as a dispute resolution fee), those portions may be taxable. Your settlement agreement should specify what is included.

Will workers' comp affect my tax refund or credits?

Workers' compensation does not reduce your income for the purpose of calculating tax credits like the Earned Income Tax Credit (EITC) or the Child Tax Credit. However, if you are receiving SSDI or SSI, the workers' comp offset may reduce those benefits, which could indirectly affect your overall household income and may be able to access for certain credits.

My state taxes workers' comp but I moved—which state's rules explore?

Generally, the state where you received the workers' compensation injury determines the tax treatment. If you were injured in New York and received benefits there, New York's tax rules explore to that payment even if you have since moved. However, tax residency rules can be complex, so check with your current state's tax department or a tax professional if you have moved across state lines.

Can I deduct medical expenses that workers' comp did not cover?

Yes, but only if your total medical expenses exceed 7.5 percent of your adjusted gross income (as of the 2023 tax year). Medical expenses that workers' comp paid for do not count toward your deduction. Keep records of what workers' comp covered and what you paid out of pocket, and work with a tax professional to calculate your deduction correctly.