How to File Income Tax When You Were on Workers’ Compensation All Year

Understanding Tax Rules for Workers’ Comp Payments

Many taxpayers receive workers’ compensation after an injury or illness and wonder whether they need to file a tax return if they were on workers’ comp the entire year. Workers’ compensation has special tax rules, and in most cases, these benefits are not considered taxable income by the IRS. But there are important exceptions and filing requirements depending on your situation.

Here is exactly how to file income tax when you were on workers’ compensation all year and what rules apply to your refund, credits, and return status.

Are Workers’ Compensation Benefits Taxable?

In most situations, workers’ compensation payments are not taxable for federal income tax purposes. According to IRS rules, payments you receive under workers’ comp due to an on-the-job illness or injury are excluded from income.

This means:

• no federal tax withholding
• no W-2 reporting for workers’ comp
• no income tax owed on the benefits themselves

However, this applies only if workers’ comp is your only income.

Do You Need to File a Tax Return?

Even though workers’ compensation is not taxable, you may still need to file a tax return in the following situations:

• you received taxable interest
• you received Social Security in addition to workers’ comp
• you had another job earlier in the year
• you received unemployment compensation
• you qualify for refundable tax credits

If workers’ comp is your only source of income, many taxpayers are not required to file a federal return. But there are reasons you might want to file anyway.

Workers’ Compensation and Tax Credits

You may still qualify for tax credits based on your filing status, dependents, or other circumstances, including:

• Earned Income Tax Credit (if you had wages before the injury)
• Child Tax Credit
• Additional Child Tax Credit
• medical deductions
• disability-related deductions

These credits may still apply even if you currently are not receiving taxable income.

Social Security and Workers’ Comp Offset Rules

If you receive Social Security Disability Insurance (SSDI) and workers’ comp at the same time, part of your SSDI may become taxable if certain thresholds are triggered. Workers’ comp itself stays non-taxable, but the SSDI portion may be affected.

IRS rules require special calculations for these offsets, so filing correctly is important.

Filing a Return When Workers’ Comp Is Your Only Income

If workers’ compensation is your only income for the entire year and you have no other taxable income, you may not be required to file a federal tax return. However, filing could be beneficial if:

• you qualify for refundable credits
• you are required to file for state tax purposes
• you want a tax refund for other reasons
• you received a state tax reimbursement

Always check state rules because some states treat workers’ comp differently.

Workers’ Compensation and Refund Eligibility

Workers’ comp itself will not generate a tax refund, but you could receive a refund if you:

• worked earlier in the year
• had income tax withholding before injury
• qualify for refundable credits
• qualify for dependent-based credits

Many taxpayers still get refunds even though their income later came from workers’ comp.

What You Need When Filing

When filing a return:

• report any taxable wages earned before workers’ comp began
• report other income such as unemployment or SSDI
• verify whether you qualify for refundable credits
• keep workers’ comp documents for recordkeeping even if not taxed

You do not enter workers’ compensation as taxable wages, but you should keep annual statements for proof of benefits.

Workers’ compensation benefits are generally not taxable, but you still may need to file a return depending on other income sources and possible refundable credits. Filing may help you qualify for tax refunds even if workers’ comp was your only income for most of the year.

Knowing how to file income tax when you were on workers’ compensation all year ensures accuracy and prevents unnecessary IRS questions later.