Workers’ Compensation Benefits are Tax Exempt
Workers’ compensation is not taxable. According to the IRS, “Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.”
Most workers’ compensation benefits are not taxable at the state or federal levels. Workers’ compensation falls into the same category of non-taxable income as:
- Public welfare fund payments;
- Compensatory (but not punitive) damages for physical injury or sickness;
- Disability benefits that fall under a “no-fault” car insurance policy for loss of income or earning capacity as a result of injury;
- Compensation for permanent loss of limb, loss of physical body function, or permanent disfigurement.
In other words, for federal income tax purposes, workers’ compensation benefits awarded due to a work injury are exempt from tax. Payments to survivors are exempt under the same circumstances.