Workers’ Comp & Taxes: Do You Have to Pay Taxes on Your Settlement?

Tax season is here, and if you’ve received workers’ compensation benefits in California, you might be wondering: Do I have to pay taxes on my workers’ comp settlement? The short answer is no—workers’ comp benefits are generally not taxable at the state or federal level. However, there are a few exceptions and important details you should know.

At J Smith Law, we want to make sure injured workers understand their rights and know what to expect when it comes to their financial future. Here’s what you need to know about workers’ compensation and taxes in California.

Are Workers’ Comp Benefits Taxable in California?

Under both federal and California state law, workers’ compensation benefits are not considered taxable income. This means you do not have to report your settlement or weekly disability payments as income on your tax return. These benefits are designed to support injured workers and are exempt from federal and state taxes under IRS Publication 525.

This includes:
✅ Temporary Disability Benefits – Payments for lost wages while you recover.
✅ Permanent Disability Benefits – Compensation for lasting impairments.
✅ Medical Expense Coverage – Paid directly to medical providers.
✅ Workers’ Comp Settlements – Lump sum or structured settlements.

If you receive any of the above, you do not need to worry about paying taxes on these funds.

Are There Any Exceptions?

While workers’ comp benefits are typically 100% tax-free, there are a couple of situations where they may be partially taxable:

1. Social Security Disability (Offset Rule)

If you are receiving both workers’ comp benefits and Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), your SSDI benefits may be reduced (offset) due to your workers’ comp payments. In this case, the offset portion of your SSDI benefits may be taxable.

For example, if your total disability benefits exceed 80% of your pre-injury wages, the Social Security Administration (SSA) may reduce your SSDI benefits. The amount they reduce from SSDI could be taxable, even though your workers’ comp benefits remain untaxed.

2. Interest on Workers’ Comp Settlements

While the settlement itself is not taxable, if you receive interest on delayed payments, that interest may be taxable. This is rare but something to be aware of.

Do I Have to Report My Workers’ Comp Settlement on My Tax Return?

In most cases, no, you do not need to report workers’ comp benefits on your tax return. However, if you receive Social Security benefits that are affected by your workers’ comp payments, the SSA will send you a Form SSA-1099, which will outline any taxable portion.

If you are unsure whether you need to report part of your benefits, it’s always a good idea to consult with a tax professional.

Maximizing Your Settlement & Avoiding Surprises

While you may not owe taxes on your settlement, there are other financial factors to consider. You should:

✔️ Plan for your future – If you are receiving a lump sum settlement, consider working with a financial planner to manage your funds wisely.
✔️ Watch out for Medicare Set-Asides (MSAs) – If your settlement includes future medical care, some of those funds may need to be set aside for Medicare compliance.
✔️ Keep track of all documents – Store your workers’ comp settlement paperwork for your records, even though it’s not taxable.

Have Questions About Your Workers’ Comp Case? We Can Help!

If you’re dealing with a workplace injury and need help securing the benefits you deserve, J Smith Law is here to fight for you. Our experienced California workers’ compensation attorneys can help you navigate the claims process, ensure you receive the full benefits you’re entitled to and answer any questions about your settlement and financial future.

📞 Call us today for a consultation! Let us take care of the legal side while you focus on recovery.