Worker's compensation benefits are generally not taxable at the federal or state level. However, there is an exception when an individual receives Social Security Disability Insurance payments or Supplemental Security Income in addition to worker's compensation.
In this case, the Social Security Administration can lower the amount of SSDI or SSI that a person receives in order to keep the combined worker's compensation benefits and SSDI/SSI below a certain income threshold. Then, the amount that Social Security lowers the SSDI/SSI benefits by is the amount of worker's compensation benefits that are taxable. However, even though this amount is technically taxable, the majority of individuals who receive both disability and worker's compensation benefits do not have enough taxable income to owe any federal taxes.