Are Workers’ Compensation Settlements Taxable?

Wisehart Wright Trial Lawyers | December 30, 2025 | Workers’ Compensation

After a work injury, many people worry about money. One common question is whether workers’ compensation settlements are taxable. Knowing how taxes work with workers’ compensation can help injured workers plan ahead and avoid surprises once a case is over.

In most cases, workers’ compensation settlements are not taxable under federal law or Ohio law. Still, there are a few situations where taxes can come into play. Understanding those situations helps explain the real value of a settlement.

How Workers’ Compensation Benefits Are Usually Taxed

Workers’ compensation benefits are meant to help people recover after a job-related injury or illness. These benefits replace part of lost wages and cover medical care. Because of this purpose, the law usually does not treat workers’ compensation benefits as taxable income.

In Ohio and at the federal level, workers’ compensation benefits are generally not taxed when they are paid through an approved workers’ compensation system.

This tax-free rule usually applies to:

Weekly wage replacement payments
Lump-sum settlement payments
Permanent disability benefits
Medical payments related to the injury

For most workers, this means the money received from a settlement is not subject to income tax.

When Workers’ Compensation Settlements Are Not Taxable

In the vast majority of cases, workers’ compensation settlements are not taxable at all. This includes both ongoing payments and lump-sum settlements.

A settlement is usually tax-free if:

It comes from a workers’ compensation claim
It replaces wages lost because of the injury
It pays for disability caused by the injury
It covers medical care tied to the work injury

Because these payments are directly connected to a workplace injury, the IRS does not count them as regular income.

One common exception involves Social Security Disability benefits. If a worker receives both workers’ compensation and Social Security Disability, the combined payments can affect taxes.

Federal rules limit how much a person can receive from disability benefits. When workers’ compensation payments reduce Social Security Disability payments, part of the workers’ compensation settlement may affect how Social Security income is taxed.

This situation may apply if:

You receive Social Security Disability benefits
Your workers’ compensation settlement includes wage replacement
The combined benefits go over federal limits

In these cases, the tax issue usually involves Social Security benefits, not the workers’ compensation settlement itself.

Are Settlements With Back Pay Taxable?

Some workers receive settlements that include payments for time already missed from work. Even when a settlement includes back pay, it is usually not taxable if it comes from a workers’ compensation claim.

Problems can arise if a settlement is labeled incorrectly or includes payments that fall outside the workers’ compensation system. How the settlement is classified matters when taxes are considered.

If the payment is clearly part of a workers’ compensation claim, it is usually tax-free.

Medical Benefits and Taxes

Medical benefits paid through workers’ compensation are not taxable. This includes payments made directly to doctors and hospitals, as well as reimbursements for approved medical costs.

Medical-related payments often cover:

Doctor visits and hospital care
Physical therapy and rehab
Prescription drugs
Medical equipment related to the injury

Since these payments cover healthcare costs, they are not treated as taxable income.

Structured Settlements and Tax Rules

Some workers’ compensation settlements are paid over time instead of in one lump sum. These are called structured settlements. Structured settlements are usually not taxable as long as they are part of a workers’ compensation award.

Each payment is treated the same way as a lump-sum payment for tax purposes. The way the money is paid does not change its tax-free status.

When Taxes Might Apply

Although most workers’ compensation settlements are not taxable, taxes may apply in limited situations.

Taxes may come into play if:

The settlement affects Social Security Disability benefits
Part of the settlement is tied to a claim outside workers’ compensation
The settlement is reported incorrectly

These situations are not common, but they are important to understand before agreeing to a settlement.

Why Tax Rules Matter Before Accepting a Settlement

Knowing whether workers’ compensation settlements are taxable helps workers understand what they are really receiving. A settlement that looks large may affect other benefits if tax rules are not considered.

Understanding tax rules can help with:

Planning finances after an injury
Comparing settlement options
Avoiding unexpected benefit reductions
Making informed decisions about settlement timing

Asking questions before accepting a settlement can prevent problems later.