If you're injured on the job, workers' comp benefits everyone. You get compensation for workplace injuries or illness without having to sue. Your employer and coworkers don't have to worry about liability for the accident. And your benefits help make up for the income you lose while you're out injured, but they're not taxed as income.
The tax laws for workers' comp also apply to other benefits, such as black-lung compensation for miners or Jones Act job-injury pay for the Merchant Marine. Generally, if you get money because you became sick or injured due to your job -- regardless of which law covers you -- the money doesn't count as taxable income. You don't even have to include it on your 1040. If you die and the act gives your family survivor benefits, those aren't taxable either.
If your occupational injury or workplace-caused illness is bad enough that you decide to retire, that doesn't make your retirement pay into a type of workers' comp. If your retirement benefits are based on age, prior contributions to the plan or your years with the company -- as opposed to your injuries -- they're often taxable. If you receive workers' comp benefits and Social Security benefits at the same time, the government may reduce your Social Security and tax part of your workers' comp payment.
If your workplace accident or illness leaves you legally disabled and unable to work, some of your benefits may be taxable. Workers comp and similar benefits you get as a disability pension aren't subject to tax, but if part of the benefits are based on your years of service, those are taxable. After you die, any part of the survivor benefits that isn't direct compensation for your injuries is also taxable income to your survivors.
If you go back to work but can only manage light duties, any wages you get are still taxable, just as your regular salary is. Income you receive under FECA -- the Federal Employees' Compensation Act -- for injury or illness is tax-free. If you get benefits to tide you over while the government reviews your FECA claims, however, those benefits are taxable. The same applies to any FECA sick leave benefits you get while your case is under review.
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