Is Workers Comp Taxable in California?

Mar 06, 2025 | Workers Compensation

There are many situations that may have you wondering, “Is workers’ comp taxable in California?” In California, workers’ compensation benefits are generally not taxable at the state or federal level. However, there are important considerations and exceptions that employees should be aware of to fully understand the tax implications of receiving workers’ compensation benefits.

Federal Taxation of Workers’ Compensation

Workers’ compensation benefits are not considered taxable income under federal law. According to the Internal Revenue Service (IRS), workers’ compensation benefits provided under state workers’ compensation law are excluded from income for federal tax purposes. Both temporary disability benefits and permanent disability benefits are included in this.

The reason for this is that workers’ compensation benefits are intended to replace lost wages or cover medical expenses due to a work-related illness or injury. The IRS does not tax them since these benefits are compensation for a job-related injury and not income that is generated from work.

However, if the worker also receives other forms of compensation in addition to workers’ comp, those may be taxable. These can include Social Security disability benefits and unemployment benefits. It is important for individuals to consult with a professional about these types of situations, as they can be extremely complex if they are receiving multiple benefits.

California Taxation of Workers’ Comp

Workers’ compensation benefits are not subject to state income tax in California. The California Franchise Tax Board (FTB) follows federal rules and exempts workers’ compensation benefits from taxation. Due to this rule, California workers do not need to include these benefits as part of their taxable income when filing their state income tax return.

Most Common Types of Workers’ Compensation Benefits

There are many different types of workers’ compensation benefits.

Some of the most common include:

• Temporary Disability Benefits: An employee who is temporarily unable to work due to an injury will receive these payments. These payments replace a portion of the lost wages while the worker is recovering. These payments are not taxable at the federal or state level in California.
• Permanent Disability Benefits: These benefits are also exempt from federal and California state taxes. An employee may receive these benefits if they suffer a permanent injury that prevents them from returning to their previous job or performing certain tasks.
• Medical Benefits: Workers’ comp covers medical treatment costs related to the injury, and these payments are not taxable since they are not considered income. Instead, they are a reimbursement.
• Death Benefits: If a worker dies as a result of a work-related injury, their dependents may be eligible for death benefits. These are not taxable as they are paid to the family or survivors.

Taxable Social Security Disability Benefits and Workers’ Compensation

There is an exception when it comes to Social Security Disability Insurance (SSDI) and workers’ compensation benefits being taxable. For those who are receiving both SSDI and workers’ comp benefits, the amount of SSDI benefits may be reduced by the Social Security Administration (SSA) to account for the workers’ compensation benefits. This process is called workers’ compensation offset.

The offset occurs because the combined total of SSDI and workers’ compensation benefits should not exceed 80% of the worker’s average pre-disability income. This reduction ensures that the individual is not over-compensated by receiving more than 80% of their earnings from disability-related benefits and disability pension. However, the workers’ compensation benefits themselves are still not taxed.

In California, if a worker is also receiving unemployment benefits or any other form of income alongside workers’ compensation benefits, the total income may be subject to taxation, but only the non-workers’ compensation portion would be taxable. For example, if a worker is receiving unemployment compensation, those payments are taxable, while workers’ comp benefits remain exempt.

Impact of Workers’ Compensation on Other Tax Deductions

Although workers’ compensation benefits are not taxable, there may be other financial considerations during the period a worker is on workers’ comp. Deductions from paychecks like retirement contributions, Social Security, or Medicare taxes typically do not apply to workers’ compensation payments since those are not considered earned income.

However, workers who are out of work for a prolonged period may have fewer opportunities to contribute to retirement accounts or save for the future, which could affect their overall financial situation.

Construction Accident FAQs

Q: Do You Pay Taxes on Workers’ Comp in California?

A: In California, workers’ compensation benefits are generally not subject to state or federal income tax. However, if you receive other benefits, like Social Security Disability Insurance, while also getting workers’ comp, the combined amount may affect your tax situation. It’s important to consult with a professional to understand how other income may impact your overall tax liability.

Q: Are Workers’ Comp Benefits Taxable By the IRS?

A: Workers’ compensation benefits are generally not taxable by the IRS. These benefits are designed to replace lost wages and cover medical expenses due to work-related injuries or illnesses. However, if you receive other forms of income, such as Social Security Disability Insurance, it may affect the taxability of your benefits.

Q: Is Workers’ Comp Considered Wages?

A: Workers’ compensation benefits are not considered wages. While workers’ comp provides financial support for employees injured on the job, it is designed to cover medical expenses, lost wages, and rehabilitation, but it is not classified as regular income. It typically doesn’t include additional benefits like overtime, vacation time, or bonuses.

Q: Can the IRS Take My Workers’ Comp Settlement in California?

A: In California, the IRS can potentially take a portion of your workers’ compensation settlement if you owe back taxes. Workers’ comp settlements are generally not considered taxable income for federal tax purposes, but the IRS can still seize the settlement if you have unpaid federal taxes or debts. It’s important to consult with a professional to understand how your settlement might be affected.

Contact Our Firm

If you receive workers’ comp benefits and have questions regarding the taxation process, it may be time to connect with a professional. Barry Law Group has decades of experience dealing with these situations and can provide valuable legal insight. Contact our office today.