Generally, Workers’ Compensation benefits for a work injury or illness are not taxable. Injured workers can use that money to get the care they need and to support themselves while they can’t work.

There are some more uncommon instances where some parts of a settlement could be taxed. It might occur if some funds in a Workers’ Comp settlement overlapped with some benefits the injured received from another source.

What Parts of My California Worker’s Comp Settlement Can’t be Taxed?

An injury at work can force you to worry about a mountain of medical bills and every hour that you can’t be at work to earn a living. On top of that, workers may stress over the tax implications of receiving Workers’ Comp benefits.

With most compensation from a weekly Workers’ Comp check and settlement, workers wouldn’t have to worry about setting some of their benefits aside to pay the tax man in the spring. This general rule also applies to families who have received Workers’ Comp death benefits after tragically losing a loved one in a workplace accident.

The IRS’s Publication 525 Taxable and Nontaxable Income for 2024 explains how it views Workers’ Comp benefits:

Found on Page 20.

“Workers’ Compensation Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors.”

These non-taxable benefits can include:

• Medical payments sent directly to health care providers for hospital bills, rehabilitation, and physical therapy.
• Weekly checks from Workers’ Comp replacing a portion of the paychecks you aren’t receiving while you can’t work.
• The costs to help you train for a new career if your injuries won’t let you return to your previous job.
• Lump-Sum settlements paid to you for doctor bills and for lost paychecks shouldn’t be taxable.

What Can Be Taxable While I’m on Workers’ Compensation?

There are some reasons you may owe some back taxes after a workplace injury. If you receive benefits from other sources, you may have to pay taxes on benefits that overlap.

Here are some of the types of support that could be taxable:

• Benefits that overlap with any benefits from Social Security you receive may be taxable
• If your social security disability benefits, combined with your Workers’ Comp, leave you earning over 80% of your original salary, you may have to pay taxes on some of the support you’ve received.
• If you go back to work but only on light duty, the wages you earn are probably taxable.
• Punitive damages you receive if your employer is punished for negligent behavior and an unsafe workplace, you may have to pay damages.

Punitive damages are assessed against a particularly reckless employer, often when they knowingly put workers at risk (or should have known of the danger). The penalties really aren’t levied for the sake of the victim; punitive damages are more about extra punishment to deter the employer and others from acting in a negligent manner again.

However, the injured worker does receive the punitive damages that are paid. The worker benefits from them, and that money would probably be taxable.

Contact a California Workers’ Comp Lawyer

These are general guidelines, but these cases can be complex when tax season comes around. It’s easy to see why workplace accident victims should rely on the help of a tax professional to figure out what they owe to the government.

In some cases, it’s also wise for injured workers to speak with a California Workers’ Compensation Lawyer in a free, confidential case consultation. An attorney makes sure Workers’ Comp administrators hear the full story and understand the hardships the worker has endured. A skilled attorney can often earn much more for clients than workers who handle their cases themselves.

The best part is, injured workers don’t have to dig up the money to pay a lawyer. Maison Law doesn’t get paid anything unless we win your Workers’ Comp case for you. Then our fee is paid out of the settlement California must pay you.