Is Workers’ Comp Taxable in 2024?

Most people don’t have to think about how workers’ comp works until they need it. So when you do need it after a workplace injury, plenty of questions will come up. For example, how will workers’ comp affect your tax return? Does anything change if you get a settlement?

Fortunately, workers’ comp doesn’t complicate taxes for most people since workers’ comp payments are rarely taxable. Keep reading to understand your tax situation.

Are workers’ comp benefits taxable?

For your 2023 income taxes, which you file in early 2024, workers’ comp benefits are not taxable. As long as you receive the benefits according to your state’s workers’ comp laws, they are tax-free for both state and federal income taxes. Keep in mind that if you keep working after a work injury, you won't pay taxes on the workers' comp income but you will still pay tax on any work income you have.

There are some possible exceptions, as explained below, but these are rare. If you are in a situation where your employer or the government is asking you to pay tax on workers’ comp payments, consider speaking with a tax professional or lawyer.

Is a workers' comp settlement taxable?

No, a workers' compensation settlement isn't taxable by either the IRS or your state government in 2023 or 2024. This is true for lump-sum settlements and structured settlement plans.

Are survivor benefits taxable?

As long as you are legally eligible for the benefits, workers' compensation survivor benefits aren't taxable. So if your spouse, parent, or relative dies from a work injury and you receive survivor benefits or workers' comp covers funeral expenses, you won’t have to pay income tax.

6 taxes you might have to pay while on workers’ comp

There are only a handful of situations where you’ll need to pay state or federal taxes while getting workers’ comp. In general, work you do while getting workers’ comp is taxed like any other work you do. Excess payments, like if you get payments for medical expenses that were already paid for, you will have to pay back the workers’ comp or pay tax on that since it’s additional income.

Here are six situations when you may pay tax while receiving workers’ comp:

1. You deduct your medical bills and get reimbursed.

2. You receive excess workers' comp payments.

3. You work while receiving benefits.

4. You keep receiving pay from your employer.

5. You use paid time off after your injury.

6. You also receive state or federal disability benefits.

1. You deduct your medical bills and get reimbursed

As you wait for your workers’ comp payments to begin, you could have to pay taxes on any medical expenses you deduct or reimburse yourself for.

For example, let’s say you use money from a flexible spending account (FSA) or health savings account (HSA) to pay a medical bill. If the workers' comp insurance company later reimburses you for the medical expenses you already, you'll have to do one of the following:

• Pay back the money from the insurance company.

• Keep the insurance money and pay back the FSA or HSA money you spent.

• Keep the insurance money and pay income tax on it.

2. You receive excess workers' comp payments

In most cases when you receive excess workers' comp payments, you will either pay them back or their value will come out of your future settlement agreement. However, if you never pay them back, excess payments are generally taxable as income.

3. You work while receiving benefits

While you don't pay tax on workers' comp benefits, if you do any modified-duty or light-duty work, that income is treated like your regular wages and you'll pay regular income taxes on it.

4. You keep receiving pay from your employer

If you miss work time after your injury, but your employer continues paying your usual wages, you’ll need to pay taxes on them the same as you did before.

States like Ohio let employers choose to keep paying wages instead of having their employees receive workers’ comp benefits. In Ohio specifically, the state calls this program salary continuation, but it may have a different name in your state.

5. You use paid time off after your injury

If you use paid time off (PTO) or paid sick leave while recovering after your injury, you have to pay regular taxes on your wages for those days.

6. You also receive state or federal disability benefits

If you receive short-term disability from your state before your workers' comp payments start, those disability benefits may be taxable depending on your state. If your workplace injury leads to a permanent condition and you apply for federal disability benefits on top of your workers' comp, know that Supplemental Security Income (SSI) isn't taxable but Social Security Disability Insurance (SSDI) is if you earn more than a certain amount.

Learn more about taxes on SSDI.

Can you deduct workers’ comp from your taxes?

No, you can’t deduct workers’ comp benefits from your federal or state taxes. The law doesn’t let you deduct any payment related to workers’ comp, including medical expenses, dental expenses, coverage for lost wages, and payments to survivors.

The only possible exception is that you can deduct any medical expenses that workers’ comp didn’t pay or reimburse you for. In that situation, you might be able to deduct those medical costs with the medical and dental expense deduction. However, most Americans won't qualify for this deduction. It requires you to itemize (instead of taking the standard deduction) and for the taxes you file in 2024, you can only deduct expenses worth more than 7.5% of your AGI for the year.

If you have unpaid medical expenses, you can still use an HSA or FSA to help with these expenses, but you also can’t deduct any medical expenses you paid through either type of account.

Get help maximizing your workers’ comp

As you think about filing for a workers’ comp claim, many other factors besides taxes come into play. For example, should you take a settlement? Are your workers’ comp payments enough or could you ask for more?

An Atticus lawyer can answer any questions you have about benefits in your state and ensure you're getting the full payments and medical benefits you deserve. Take our quick workers’ comp benefits quiz to see if you could qualify. (Your initial consultation is free and you never have to pay our lawyers unless they help you win benefits or get a settlement.)