If you are receiving workers compendation benefits you do not pay tax on the benefits received by you or your survivors for job related sickness or injuries paid under a workers compensation act or workers compensation statute in the nature of a workers compensation act.
However, the tax exemption on your tax return 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. These benefits are taxable.
Further, if your employer continues to pay your regular salary or wages during the period you receive benefits and requires you to turn over your workers compensation benefits you are taxed on your tax return on the overage that was paid to you by your employer.
Finally, the part of your workers compensation benefits that reduces your social security benefits or equivalent railroad retirement benefits is considered social security benefits and may be taxable on your tax return under rules for those types of income. Accordingly, your workers compensation may be indirectly subject to tax on your tax return.