Workers' comp payments are generally not taxable income
Workers' compensation payments for physical injuries or illnesses are not reported as income on your federal tax return. The IRS treats them as reimbursement for lost wages due to a work-related injury, not as taxable earnings. This means you will not owe federal income tax on the money you receive from a workers' comp claim.
However, there is one major exception: if you also received unemployment benefits while collecting workers' comp, part of your unemployment may be taxable. The IRS requires you to report unemployment income, and in most states you cannot collect both programs at the same time — but the rules vary by state, so this situation does arise.
State tax treatment varies. Most states follow the federal rule and do not tax workers' comp payments. A small number of states tax workers' comp in specific circumstances. Check your state's tax agency website or ask your workers' comp insurer whether your state taxes these payments.
Key Takeaways
- Federal workers' comp payments for physical injury or illness are not taxable and do not go on your federal tax return.
- If you received unemployment benefits at the same time as workers' comp, the unemployment portion is taxable and must be reported.
- A few states tax workers' comp payments in certain situations, so check your state's rules before filing.
- Your workers' comp insurer will not send you a 1099 form for non-taxable injury payments, but will send one if you received taxable benefits.
When workers' comp becomes taxable income
Workers' comp for a physical injury is not taxable. But workers' comp for a non-physical injury — such as emotional distress or mental anguish — is taxable at the federal level. This distinction matters because some claims include both physical and mental components, and the IRS taxes only the mental health portion.
If your workers' comp settlement or award included a payment for lost wages that you would have earned during your recovery, that portion is also taxable. The insurer or your employer should separate this out on any paperwork they send you. Ask them to clarify which part of your payment is for the injury itself (non-taxable) and which part is for lost wages (taxable).
Punitive damages — money awarded as a penalty against your employer — are taxable. These are rare in workers' comp cases but do occur in some states when an employer acted with gross negligence or intentional misconduct.
What forms you will receive and what to do with them
If your workers' comp payment is entirely for a physical injury, your insurer typically will not send you any tax form. You do not report it anywhere on your return. Keep your own records of the payments you received in case the IRS asks.
If part of your workers' comp is taxable — because it includes lost wages, mental health damages, or punitive damages — your insurer will send you a Form 1099-NEC (Nonemployee Compensation) or Form 1099-MISC (Miscellaneous Income). The amount shown on the form is what you report as income on your tax return. The specific line depends on your form and the type of income, but your tax software will usually direct you to the right place.
If you received unemployment benefits while also collecting workers' comp, you will receive a Form 1099-U (Unemployment Compensation) for the unemployment portion. This entire amount is taxable and must be reported on your return, even if you also received non-taxable workers' comp.
Reporting workers' comp on your federal return
Non-taxable workers' comp does not appear anywhere on your federal return. You do not list it, do not report it, and do not need to explain it. The IRS does not require you to disclose that you received it.
Taxable workers' comp goes on your return as income. If you received a 1099-NEC or 1099-MISC, enter the amount on Schedule 1 (Form 1040), Part I, Line 8 (Other Income). If you received a 1099-U for unemployment, that goes on Schedule 1, Line 5. Your tax software will walk you through this if you enter the form information.
If your only income for the year was non-taxable workers' comp, you may not need to file a return at all. But if you had other income — wages, self-employment income, investment income — you must file and report that income normally. The workers' comp does not change your filing requirement; your other income does.
State tax considerations
Most states do not tax workers' comp payments for physical injuries, following the federal rule. However, a handful of states have different rules. Louisiana, for example, taxes workers' comp in certain circumstances. New Mexico taxes workers' comp paid by the state fund but not by private insurers. Illinois taxes workers' comp only if you also received Social Security benefits.
If you live in a state that does tax workers' comp, your state return will require you to report it as income. Your state tax agency website will have a fact sheet or guidance document explaining the rule. You can also call your state's tax department or ask your tax preparer.
If you moved during the year you received workers' comp, you may owe tax to both your old state and your new state, depending on when you moved and which state's rules apply. This is rare but does happen. Your tax preparer can help you sort out which state gets what.
Workers' comp and other tax credits or deductions
Non-taxable workers' comp does not reduce your income for purposes of tax credits. If you received workers' comp and had no other income, you may still be able to claim the Earned Income Tax Credit (EITC) if you have a may have access to child, because the credit is based on earned income, not all income. However, this depends on your specific situation and state rules.
Workers' comp also does not count as income when determining whether you can be claimed as a dependent on someone else's return. If you are an adult living with a parent and your only income is non-taxable workers' comp, your parent may still be able to claim you as a dependent if you meet the other requirements.
If you paid medical expenses related to your work injury and your workers' comp did not cover all of them, you cannot deduct the uncovered portion on your tax return. Workers' comp is considered a reimbursement, and the IRS does not allow you to deduct medical costs that were reimbursed by any source, including workers' comp.
Frequently Asked Questions
Do I have to report non-taxable workers' comp on my tax return?
No. Non-taxable workers' comp for a physical injury does not go anywhere on your federal return. You do not list it, do not explain it, and do not need to mention it. Keep your own records in case you are audited, but the IRS does not require you to disclose it.
What if I received workers' comp and unemployment at the same time?
The unemployment portion is taxable and must be reported on your return. You will receive a Form 1099-U for the unemployment. The workers' comp portion remains non-taxable if it was for a physical injury. Report only the unemployment on your return.
Will I owe taxes on a workers' comp settlement?
It depends on what the settlement covers. A lump-sum settlement for a physical injury is not taxable. But if the settlement includes payment for lost wages, punitive damages, or mental health injuries, those portions are taxable. Ask your attorney or the insurer to break down what each part of the settlement covers.
Does workers' comp count as income for Social Security or Medicare?
Non-taxable workers' comp does not count as earned income for Social Security purposes. If you are working and also receiving workers' comp, only your wages count toward your Social Security record. Workers' comp does not affect Medicare may be able to access or premiums.
What if my state taxes workers' comp but I live in a different state now?
You may owe tax to the state where you earned the workers' comp, the state where you lived when you received it, or both, depending on each state's rules. This is complex and varies by state. Contact the tax agency in the state where the injury occurred or where you lived when you received the payment.