Can I Exclude My Workers' Compensation from Income?

Yes — workers' compensation benefits received under state or federal workers' compensation laws are fully excluded from your taxable income. This applies to payments for job-related injuries or illness, including payments to survivors if a worker dies on the job. If you return to work at reduced earnings and receive a reduced workers' comp amount, the exclusion still applies. However, if workers' comp reduces your Social Security disability benefits, the Social Security portion may become taxable. Regular sick pay from your employer (not through workers' comp) is taxable — the source of the benefit matters.