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Do You Need to Report a Workers’ Compensation Settlement on Your Taxes in California?
Navigating tax obligations after a workplace injury can be confusing, especially when you receive a workers’ compensation settlement. If you live in California, here is what you need to know to report a workers’ compensation settlement on your taxes.
General Rule: Workers’ Compensation Settlements Are Not Taxable
In California, workers’ compensation settlements are exempt from federal and state income taxes. This applies to all types of benefits, including:
- Medical expenses (e.g., surgeries, medications, physical therapy)
- Wage replacement (temporary or permanent disability payments)
- Lump-sum settlements for permanent injuries or future medical care.
These benefits support recovery, not to replace taxable income. The IRS and California tax laws classify them as non-taxable social insurance.
Exceptions When Taxes Might Apply
While most settlements are tax-free, certain scenarios could trigger tax liabilities:
1. Social Security Disability (SSDI/SSI) Offsets
- If you receive both workers’ comp and SSDI/SSI, the Social Security Administration (SSA) may reduce your federal benefits if the combined total exceeds 80% of your pre-injury earnings.
- The portion of workers’ comp that replaces the reduced SSDI/SSI benefits becomes taxable.
- For instance, if your pre-injury income was $50,000 and your combined benefits exceed $40,000 (80%), the excess amount may be subject to taxation.
2. Interest in Delayed Settlements
- Interest paid on late workers’ comp payments (e.g., due to insurance delays) is taxable income.
3. Non-Workers’ Comp Income
- Light-duty wages: Returning to work part-time while receiving benefits means those wages are taxable.
- Retirement benefits: If you retire due to injury, pensions or 401(k) withdrawals remain taxable.
4. Discrimination Claims (132a Awards)
- Additional benefits from suing an employer for discrimination (e.g., retaliation for filing a claim) are taxable Do You Need to Report the Settlement on Your Tax Return?
- No, in most cases. Do not report a workers’ compensation settlement as taxable income on your federal (Form 1040) or California state tax returns.
- Yes, if:
- You received a 1099 form for SSDI offsets (report the taxable portion).
- You earned interest on delayed payments.
Key Tax-Saving Strategies
1. Structure Settlements Carefully
- Allocate more funds to medical expenses (non-taxable) and less to wage replacement if you also receive SSDI.
2. Consult a Tax Professional
- Complex cases (e.g., multiple benefit sources) require expert guidance to avoid overpayment.
3. Keep Detailed Records
- Track medical reimbursements, offsets, and interest to simplify filing.
To Report a Workers’ Compensation Settlement on Your Taxes: Basic Questions
- Are lump-sum settlements taxed?
No, unless they include taxable components like interest or SSDI offsets. - Can my employer deduct workers’ comp from their taxes?
Yes, but this does not affect your tax liability. - What if my settlement includes back pay?
Back pay for lost wages is taxable if it is part of a legal settlement outside workers’ comp.
Conclusion about to report a workers’ compensation settlement on your taxes
Most California workers’ compensation settlements are tax-free, but exceptions exist for SSDI offsets, interest, and non-injury-related income. Always consult a tax advisor or workers’ comp attorney to ensure compliance and maximize your benefits.
Need Help?
For personalized advice, contact a trusted California workers’ compensation lawyer or tax professional. Visit Pacific Workers for expert guidance.
Need help with your Insurance Adjuster? Contact Pacific Workers’, The Lawyers for Injured Workers, for a free, confidential case evaluation. Call 800-606-6999 or book an appointment here.
About the author
Bilal Kassem, President and Co-founder, is the visionary leader of Pacific Workers. His unwavering commitment to excellence, empowering others at the core of our organization. With a flair for creativity, Bilal infuses fresh ideas into every initiative we take.
Drawing inspiration from captivating stories like “Goosebumps,” he guides our team with determination. Beyond his professional endeavors, Bilal embraces the great outdoors. As a result, relishing adventures such as backpacking and exploring uncharted territories. Sushi is his preferred treat, nourishing both his body and spirit.
In his free time, he enjoys hitting the gym and indulging in blockbuster films. Also, he finds motivation in the legacies of historical figures like George Patton. By leading with empathy, Bilal fosters a supportive atmosphere. This is why every team member feels empowered to excel.