If I Only Receive Workers’ Comp, Do I Need to File Taxes?

Many individuals receiving workers’ compensation benefits wonder if these payments are taxable or if they need to file an income tax return. Understanding these points is important for managing your financial obligations and avoiding tax issues.

Understanding Workers’ Compensation Taxability

Workers’ compensation benefits are not taxable income. This non-taxable status applies to payments for personal injury or sickness under a workers’ compensation act or similar law. These benefits compensate for lost wages due to workplace injury or illness and for medical expenses, not as earned income. This exemption applies whether benefits are received as scheduled payments or as a lump-sum settlement.

However, in specific circumstances, a portion of workers’ compensation might become taxable. If a settlement includes interest or punitive damages, those components are taxable. Also, if you receive both workers’ compensation and Social Security Disability Insurance (SSDI) benefits, a portion of your workers’ compensation might be taxed if it offsets your SSDI benefits. This offset occurs when the combined total of these benefits exceeds 80% of your pre-disability average earnings, with the excess becoming taxable.

Determining Your Filing Obligation

Even if your workers’ compensation benefits are not taxable, you might still have a federal tax filing obligation based on other types of income or your filing status. The IRS sets specific gross income thresholds that determine whether an individual must file a tax return. These thresholds vary depending on factors such as your filing status (e.g., single, married filing jointly, head of household) and your age.

Workers’ compensation benefits do not count towards your gross income for filing thresholds because they are non-taxable. However, other income sources, such as earnings from a part-time job, interest, dividends, or unemployment benefits, contribute to your gross income. For example, in 2024, a single filer under age 65 needs to file if their gross income is at least $14,600. For married filing jointly (both under 65), the threshold is $29,200.

If your only income for the year is non-taxable workers’ compensation benefits, and you have no other filing requirements (such as owing certain taxes or having self-employment income), you do not need to file a federal income tax return. Always consider all income sources, not just workers’ compensation, when assessing your filing requirement.

Reporting Workers’ Compensation on Your Tax Return

Since workers’ compensation benefits are not taxable, they do not need to be reported on your federal income tax return. You will not receive a Form W-2 or Form 1099-MISC for non-taxable workers’ compensation payments. This means most recipients require no specific entry on their tax forms for these benefits.

However, if you receive a Form 1099-MISC or other tax document related to your workers’ compensation, review it carefully. This might occur if a portion of your benefits was taxable, such as for punitive damages, or if there was an offset with other taxable benefits like Social Security Disability. In such instances, the taxable portion of your workers’ compensation should be reported as “Other income” on Schedule 1 (Form 1040), Line 8.

If an employer incorrectly includes non-taxable workers’ compensation on a W-2 form, contact them for a correction. If a correction is not possible, a workaround may be necessary on your tax return to subtract the non-taxable amount. Maintain thorough records of all workers’ compensation payments and related documents to ensure accurate tax reporting, even when no reporting is required.