So You received Worker's Compensation benefits and now you are wondering if you have to include this amount in your taxable income.
You do not have to pay tax on the benefits that you received if you received them under your State's worker's compensation act for a physical injury of illness.
However, the exemption of this income does not apply to retirement plan benefits you receive based on age, length of service, or prior contributions to the plan, even though you retired because of an occupational sickness or injury.
Also, If your employer continues to pay your regular salary or wages and requires you to turn over your workers compensation benefits you will be taxed only on the overage that your employer pays you. The portion from worker's compensation is not taxable as stated above.
You should also note that the portion of your workers compensation that reduces your social security benefits is considered social security benefits and may be taxable on your tax return under rules for Social Security benefits.