Are Workers' Comp Indemnity Earnings Taxable?

A work-related injury may result in disability payments while you recover.

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If you live in any state but Texas, state law generally requires that your employer carry workers' comp insurance, barring some states' exceptions for companies with very few employees. When you get injured or ill because of your work, you may receive temporary or disability benefits because of the injury. Medical-only or first aid injuries do not involve indemnity payments because the injured worker does not lose any time from work. But in most states, when you miss from three to 14 days of work or more, you are entitled to indemnity earnings to help replace part of your lost salary.


Payments you get under workers' compensation programs are almost always exempt from tax.

Workers' Comp Indemnity Benefits

Workers' comp claims are classified as medical-only, first aid or indemnity claims. An indemnity claim usually involves substantial time away from work. It could involve physical therapy or even rehabilitation if you can no longer physically perform the job you had when you were injured.

Workers' comp insurance pays you a part of your salary with maximum and minimum levels set by the state's average weekly wage when you lose time at work. This includes payments to survivors of those who experienced mortal work injuries.

A permanent injury involves a physical loss in functionality in some way or another. When a person sustains a permanent injury – which could include a loss of a limb, sight, hearing or other permanent ailment – he continues to receive disability payments until his condition stabilizes. Once the treating doctor decides the injured worker's condition is permanent and stable, the workers' comp carrier will offer a monetary settlement for loss of wages and future medical treatments.

Workers' Comp and Taxes

An injured worker receives relief from most state and all federal taxes on indemnity earnings related directly to workers' compensation as provided under state statutes. But this does not apply to retirement disability payments, only to workers' compensation. This includes any workers' compensation death benefits paid to survivors.

It also includes large monetary settlements made to the injured worker because of his permanent injury. But when the carrier delays the monetary settlement, interest may be added to the settled amount. The interest on an indemnity payment, depending upon the state in which you live, could be subject to state and federal taxation.

In rare cases where workers' comp payments reduce your eligibility for Social Security or railroad retirement benefits, they may be taxable.

Special Cases Involving Disability Pensions

Some companies offer disability pensions to employees with work-connected disabilities. If you receive a disability pension managed under a state law that provides these benefits only to employees with work-related injuries, part of your pension may be workers' compensation. The part that is workers' compensation is not taxable under IRS rules found in Publication 525. But the part of your pension based on your years of service falls under annuity or pension taxation.

Effects of Tax Law Changes

The changes to federal tax law that went into effect in 2018 don't generally affect workers' compensation, including indemnity benefits. Some people receiving taxable interest on delayed indemnity payments or taxable portions of pensions that also include workers' compensation might owe less in tax, thanks to the rising standard deduction and decreases in tax rates.