When you’re living on a reduced check, you want to know how much of it you actually get to keep. The good news is that, for most injured workers, workers’ comp money is yours to keep, tax-free. Philly Injury Lawyer makes sure our clients understand the tax side before they settle, so there are no surprises in April.
The Short Answer
Generally, no. Workers’ comp benefits paid for a work injury or illness are not taxable income:
- Federal income tax: workers’ comp benefits are excluded from income. The IRS explains this in Publication 525.
- Pennsylvania income tax: workers’ comp benefits are not taxed.
- Philadelphia wage tax: comp benefits are not wages, so the city wage tax does not apply to them.
This includes weekly checks, specific loss benefits and, generally, lump-sum settlements of a workers’ comp claim.
The Exceptions
- Social Security Disability offset. If you also receive Social Security Disability and your SSDI is reduced because of workers’ comp, part of the comp amount can be treated as taxable. See Workers’ Comp and Social Security Disability.
- Returning to work. Wages you earn on light duty are taxed like any other pay.
- Interest. Interest paid on late benefits can be taxable.
- Third-party settlements. Money from an injury lawsuit for physical injuries is generally not taxed, but some parts, such as interest or punitive damages, can be.
Should You Report It on Your Return?
You usually don’t need to report regular comp benefits as income. If you receive a Form 1099 related to your claim or you also get Social Security, talk to a tax professional.
Planning a Settlement? Call Us
We structure settlements with taxes and benefits in mind. Call (215) 735-4800. We Win or It’s Free®.
Frequently Asked Questions
Is a workers’ comp lump-sum settlement taxable?
Generally no, as long as it is paid under the workers’ comp law for a work injury or illness.
Do I get a 1099 for workers’ comp?
Usually not for regular benefits. If you receive one, keep it and ask a tax professional how it should be handled.
Does workers’ comp count as income for other programs?
It can. Programs like SSI, food assistance or housing aid may count comp benefits as income even though they aren’t taxed.
Pennsylvania Law in Plain English
Federal tax law excludes workers’ comp benefits from income, and the IRS confirms this in Publication 525. Pennsylvania doesn’t tax them either. The main exception is when Social Security Disability benefits are reduced because of workers’ comp, which can make part of the comp amount taxable.
