One of the most common questions we get around this time of year is: "Do I need to report my Arizona workers compensation benefits or settlement proceeds to the I.R.S.?" or, "Are my Arizona Workers Compensation Benefits taxable?"
Almost always, the answer is NO!!! Generally speaking, Workers' compensation benefits are currently not subject to federal income taxation. However, if your workers' compensation benefit reduces your Social Security Disability benefit, the portion that reduces is considered Social Security for taxation purposes. One of the justifications for workers compensation benefits being only 66 2/3% of your regular wage is that they are tax exempt.
If an injured worker has specific questions about this matter, we recommend you contact the Internal Revenue Service or your tax advisor.
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