Workers’ Compensation and your Tax Return

Arizona Injury Law Group

Employees who get injured on the job may be entitled to and receive workers’ compensation benefits to cover medical expenses and a part of the lost wages.

Read on if you are wondering how your workers’ compensation may affect your tax return.


Work comp benefits are not counted as a part of taxable income as per both the state and federal laws. This includes any lump-sum payments for injury-related losses. As a result, you are not expected to include your benefits in your tax returns.

Work comp benefits are usually not taxable. But this may change if work comp benefits are accompanied by other benefits, such as Social Security Disability benefits.


If you receive Social Security Disability benefits and workers’ compensation payments at the same time, the Social Security Disability benefits could reduce your work comp benefits because of offsetting. Offsetting means you can’t receive more than 80 percent of your previous income.

Social Security Disability benefits are taxable. It can change your status if you were previously tax-exempt. Usually, Social Security Administration uses your average benefits, including work comp, to calculate the offset.


Your work comp benefits over the entire tax year will be non-taxable. But if you resume work for any period of time, including light duty, you will be expected to pay taxes. You must also file tax returns if you subsidize your income while receiving benefits by receiving money from a retirement plan or 401k.

Although work comp is not taxable income, it can affect your tax returns. If you and your spouse file joint returns, your work comp benefits could put you in a lower tax bracket, reducing your tax obligation.

For the correct understanding of how your benefits affect your tax obligations, talk to a workers’ compensation lawyer.

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