Benefits you receive for occupational sickness or injury are exempt from tax if they are paid under a workers’ compensation law. This exemption from tax would also apply to survivor benefits paid to your beneficiaries. But retirement plan benefits you receive based on your age, length of service, or any prior contributions you made to a workers’ compensation plan are not exempt from tax, even if you retired because of an occupational sickness or injury.
If you receive a disability pension that only provides benefits to employees who have disabilities connected with their service, part of that disability pension is workers’ compensation that is exempt from tax, and part is a pension, based on years of service, that is taxable as a pension or annuity.
If you return to work after a sickness or injury for which you received workers’ compensation, and you are assigned light duty when you return, your wages are taxable.
If part of your workers’ compensation reduces the amount of social security or railroad retirement benefits, that part may be taxable. On your annual Social Security Benefit Statement (Form SSA-1099) this reduction will be shown under “Description of Amount” in box 3. If you are receiving railroad retirement benefits, the credit will be reported in box 6 entitled “Workers’ Compensation Offset” on your Statement of Payments by the Railroad Retirement Board for the Year. The amount of the Workers’ Compensation Offset is included in the Gross and Net Social Security Equivalent Benefit Portion of Tier I paid for the year, and is reported in box 6 only for your information.