Are Federal Workers’ Compensation Benefits Taxable?

No, federal workers’ compensation benefits are generally not taxable. If you receive workers’ compensation for an illness or injury on the job under a federal program like the Federal Employees’ Compensation Act (FECA), you do not have to pay federal income tax on those benefits.

If you also receive Social Security Disability Insurance (SSDI), part of your compensation may be taxed if the combined benefits exceed a certain threshold. Check with an Atlanta federal workers’ compensation lawyer to understand your specific situation.

General Tax Rule for Federal Workers’ Compensation

Federal workers’ compensation benefits are generally not subject to federal income tax. The IRS classifies these benefits as non-taxable income, meaning you do not have to report them on your tax return. This tax exemption applies only if the payments are made under a workers’ compensation law for a job-related injury or illness.

As long as you are receiving benefits because you were hurt or became ill due to your work, the money is not considered taxable income. This rule helps protect injured workers from additional financial stress while they recover.

Exceptions to the General Tax Rule for Federal Workers’ Compensation

While federal workers’ compensation benefits are usually not taxable, there are a few important exceptions to be aware of. If you’re a federal employee dealing with a work-related injury or illness, understanding whether your workers’ compensation benefits are taxable is just one piece of a much larger puzzle.

The federal claims process can be overwhelming to deal with, especially when you’re also trying to recover. An experienced federal workers’ compensation attorney can determine if you qualify for any exceptions.

When Workers’ Comp Is Combined with SSDI

If you receive both workers’ compensation and Disability benefits, part of your total benefits may become taxable. This happens because of the offset rule. The Social Security Administration may reduce your SSDI payments so that your combined benefits don’t go over a certain limit. 

When this offset occurs, the amount by which your SSDI is reduced is added back in and considered taxable Social Security income. As a result, you may owe taxes on the part of your SSDI (not your workers’ comp) because of how the two benefits are calculated together.

Lump-Sum Settlements and Structured Payments

Most lump-sum workers’ compensation settlements are not taxable as long as they are paid due to a work-related injury or illness. However, if any part of the settlement is meant to replace wages after recovery or includes interest or payment for non-injury-related claims, that portion might be taxable.

Structured payments (ongoing payments over time) are generally treated the same way. It’s important to review the settlement agreement and speak with a federal workers’ compensation attorney to understand any tax obligations.

State and Local Tax Considerations

In most cases, the general rule that federal workers’ compensation benefits are not taxable also applies to state and local taxes. If you are receiving these benefits because of a job-related injury or illness, you typically do not have to pay state income tax on them either.

However, tax laws can vary slightly depending on where you live. It’s a good idea to check with your state or local tax authority to make sure there are no unique rules that apply to your situation. A quick call or visit to their website can help you confirm whether your benefits are fully tax-free under local laws.

Reporting Requirements for Federal Workers’ Compensation

In most cases, you do not need to report federal workers’ compensation benefits on your tax return. Since these benefits are generally not considered taxable income, they do not need to be included when filing your federal taxes.

There are usually no specific tax forms involved just for workers’ compensation. You should not receive a Form W-2 or 1099 for these benefits. However, perhaps you also receive SSDI, and part of it becomes taxable due to the offset rule. In that case, the Social Security Administration will send you a Form SSA-1099 to report that portion.

Even though you may not need to report workers’ comp on your return, it’s still important to keep good records. Hold on to any letters or documents you receive about your benefits, including approval notices, payment summaries, and correspondence from the Office of Workers’ Compensation Programs (OWCP). These documents can be useful if questions come up later.

Consult an Experienced Federal Workers’ Compensation Lawyer

Our team is here to help you make sense of the system and fight for the full benefits you deserve. At John Foy & Associates, we assist injured federal workers throughout Atlanta and across Georgia.

With more than 350 years of combined legal experience, we know how to handle the specific rules and procedures that apply to federal employees. Whether you’re unsure about your tax responsibilities or facing delays, we’re ready to guide you.

Don’t risk losing the support you’re entitled to. Call The Strong Arm™ today to connect with a knowledgeable federal workers’ compensation attorney, get clear answers, and obtain strong representation.