Is Workers' Comp Taxable in Massachusetts?

Workers’ compensation benefits paid under Massachusetts chapter 152 are not taxable income on your federal return or your Massachusetts return, with one exception most people never hear about: if you also receive Social Security Disability and your SSDI check is reduced because of the comp, the slice of comp equal to that reduction is treated as a Social Security benefit and can be federally taxable, while Massachusetts subtracts it again on the state return. Everything else on the subject is detail around that sentence. The weekly check under M.G.L. c. 152, sec. 34 or sec. 35, the specific-injury payment under sec. 36, medical payments, and a lump sum settlement under sec. 48 are all amounts “received under workmen’s compensation acts,” which 26 U.S.C. sec. 104(a)(1) excludes from gross income.

This page walks through why the general rule holds, where it stops, and what the exception looks like on paper, because the place most people look for the answer gives only half of it.

The General Rule, and Why Massachusetts Follows It

The federal rule is one clause. Section 104(a) of the Internal Revenue Code says that gross income does not include “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness.” Chapter 152 is a workmen’s compensation act, so the weekly benefits it pays are outside federal gross income. The Treasury regulation that interprets the clause, Treas. Reg. 1.104-1(b), extends it to amounts paid “under a statute in the nature of a workmen’s compensation act” and to comp paid to the survivors of a deceased employee. IRS Publication 525 puts it in plain terms: amounts you receive as workers’ compensation for an occupational sickness or injury “are fully exempt from tax if they’re paid under a workers’ compensation act.”

Massachusetts gets to the same place by a different road. M.G.L. c. 62, sec. 2(a) defines Massachusetts gross income as “the federal gross income,” then lists specific items to add and subtract. Workers’ compensation is not on the add list. So an amount that never entered federal gross income never enters Massachusetts gross income either, and there is no separate state exclusion to find because none is needed.

That covers the ordinary case completely. A Massachusetts worker who receives only chapter 152 benefits, with no Social Security Disability and no wages in the same period, has nothing from the comp to report as income on either return.

Which Chapter 152 Payments the Rule Reaches

The clause reaches amounts received under the act, not only the weekly check, which is why the whole family of chapter 152 payments sits on the same side of the line.

Total incapacity, sec. 34. Sixty per cent of the average weekly wage before the injury, subject to the state maximum and minimum rates, for up to 156 weeks. Excluded.

Partial incapacity, sec. 35. Sixty per cent of the difference between the pre-injury average weekly wage and what the employee is capable of earning after the injury, capped at seventy-five per cent of the sec. 34 amount, for up to 260 weeks under the general rule. Excluded, even though it is paid alongside wages; the wages themselves are a different matter, taken up below.

Specific injuries, sec. 36. The additional sums the statute schedules for losses such as the loss of use of an eye or a hand, or disfigurement. Paid “in addition to all other compensation,” and excluded like the rest.

Medical benefits. Payments for reasonable and necessary treatment are not income to the employee in the first place, and to the extent they reach the employee as reimbursement they are amounts received under the act.

Lump sum settlements, sec. 48. Section 48 lets the insurer and employee “redeem any liability for compensation, in whole or in part, by the payment by the insurer of a lump sum amount.” Because the lump sum is the act’s own mechanism for paying out compensation owed under it, it is generally treated like the weekly benefits it replaces. How a lump sum is divided up in the settlement documents can still matter for the Social Security exception, which is the reason to read the next two sections before signing rather than after.

Where the General Rule Stops

The exclusion is wide, but it has edges, and each of them is written into the regulation or the Code rather than left to interpretation.

Wages from light duty are wages

IRS Publication 525 says it directly: “If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light duties are taxable as wages.” A worker on sec. 35 partial benefits who goes back three days a week therefore has two income streams in the same pay period, one excluded and one taxable, and the W-2 will show only the second.

An employer top-up above the act is not comp

Treas. Reg. 1.104-1(b) says the exclusion does not apply to amounts received for an occupational injury “to the extent that they are in excess of the amount provided in the applicable workmen’s compensation act.” If an employer or a union plan continues full salary while the insurer pays the sixty per cent, the difference is not chapter 152 money. Whether it is taxable then depends on the separate rules for accident and health plans in 26 U.S.C. sec. 104(a)(3) and secs. 105 and 106, which turn on who paid for the coverage; sec. 104(a)(3) excludes insurance proceeds only where they are not attributable to employer contributions that were left out of the employee’s income, or paid by the employer.

A pension based on age or service is a pension

The same regulation says the exclusion “does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee’s age or length of service, or the employee’s prior contributions, even though the employee’s retirement is occasioned by an occupational injury or sickness.” Publication 525 adds the mirror image: where a disability pension is paid under a statute that provides benefits only for service-connected disabilities, part of it may be workers’ compensation and exempt, and the rest, based on years of service, is taxable as pension income.

A prior medical deduction comes back

The opening words of sec. 104(a) carve out “amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year.” If you paid medical bills yourself, itemized them as a deduction, and the insurer later reimbursed them after accepting the claim, the reimbursement is taxable up to the tax benefit you already took. Most people never itemize medical expenses, so this bites rarely, but it bites in exactly the disputed claims that take a year to resolve.

The Social Security Offset Exception

This is the part the one-line answer leaves out, and it is the reason a person on both programs can receive a tax form that seems to contradict everything above.

When a person receives Social Security Disability Insurance and periodic workers’ compensation at the same time, federal law caps the combined total. Under 42 U.S.C. sec. 424a, the SSDI benefit is reduced “by the amount by which the sum” of the Social Security benefits and the comp exceeds the higher of eighty per cent of the person’s “average current earnings” or the total unreduced Social Security family benefit. The Social Security Administration makes that reduction, not the comp insurer, and it applies only until the person reaches full retirement age. Where the comp is paid as a lump sum that commutes or substitutes for periodic payments, sec. 424a(b) directs the Commissioner to spread the reduction in a way that approximates the monthly rule.

The tax consequence sits in a different title of the Code. 26 U.S.C. sec. 86(d)(3) provides that where a Social Security benefit is reduced “by reason of the receipt of a benefit under a workmen’s compensation act, the term ‘social security benefit’ includes that portion of such benefit received under the workmen’s compensation act which equals such reduction.” In other words, for federal income tax purposes, a slice of your comp equal to the amount Social Security withheld is relabelled as Social Security. Publication 525 carries the same warning: “If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security benefits and may be taxable.”

“May be” is doing real work in that sentence. Social Security benefits themselves are taxable only above an income threshold. Under sec. 86(b) and (c), a taxpayer is affected only if modified adjusted gross income plus one-half of the Social Security benefits exceeds a base amount of $25,000 for most single filers and $32,000 on a joint return, and the higher tier, where up to eighty-five per cent of benefits can be included, starts above an adjusted base amount of $34,000 single or $44,000 joint. A married person filing separately who lived with their spouse at any time during the year has a base amount of zero. A household whose only income is a reduced SSDI check plus comp may owe nothing even after the relabelling; a household with a working spouse often will owe something.

How it shows up on the form

The SSA-1099 is where people first see the exception and assume a mistake. IRS Publication 915 lists “Workers’ compensation offset” among the additions in Box 3 of the form, and explains that an entry appears there if your benefits were reduced to stay within the combined limit. Box 5, the net benefits figure the return worksheet uses, therefore already includes the offset amount. A person who received a smaller SSDI deposit than the form reports is usually looking at exactly this, not an error.

Answer Capsule

Workers’ compensation benefits under M.G.L. c. 152, including weekly benefits under secs. 34 and 35, specific-injury payments under sec. 36 and lump sum settlements under sec. 48, are excluded from federal gross income by 26 U.S.C. sec. 104(a)(1), and Massachusetts follows because its gross income starts from federal gross income under c. 62, sec. 2(a). The exception is the Social Security offset: where SSDI is reduced under 42 U.S.C. sec. 424a because of comp, 26 U.S.C. sec. 86(d)(3) treats the part of the comp equal to that reduction as a Social Security benefit, which is federally taxable only above the sec. 86 income thresholds ($25,000 single, $32,000 joint). Massachusetts then deducts Social Security benefits included under sec. 86 by c. 62, sec. 2(a)(2)(H). Light-duty wages, employer top-ups above the act, and pensions based on age or service are taxable in the ordinary way.

Why the Massachusetts Answer Differs From the Federal One

Massachusetts starts from federal gross income, so the relabelled slice of comp arrives in Massachusetts gross income along with any other taxable Social Security. It does not stay there. The list of items to be deducted in M.G.L. c. 62, sec. 2(a)(2) includes, at subparagraph (H), “Social security benefits included in federal gross income under section eighty-six of the Code.” The offset amount is included federally precisely because sec. 86(d)(3) makes it a Social Security benefit for purposes of section 86, which is the category subparagraph (H) removes.

The result is a split that surprises people in both directions. The same dollars can be federally taxable and state exempt in the same year, and a Massachusetts return prepared by carrying federal figures across without the subtraction overstates state income.

Checking a Year With Comp in It, Step by Step

1. List every payment by source. Separate chapter 152 weekly benefits, any sec. 36 or sec. 48 lump sum, wages from light duty, employer or union salary continuation, disability pension, and Social Security, because each follows its own rule.
2. Set aside the chapter 152 money. Weekly benefits and settlement proceeds paid under the act are excluded under sec. 104(a)(1) and do not go on either return as income.
3. Report light-duty wages and any top-up above the act. These appear on a W-2 or plan statement and are taxed under the ordinary rules for wages or accident and health benefits.
4. Read Box 3 of the SSA-1099. If it shows a workers’ compensation offset addition, Box 5 already includes the relabelled comp, and that total runs through the sec. 86 worksheet like any other Social Security benefit.
5. Apply the sec. 86 thresholds. Below the $25,000 or $32,000 base amount, none of the benefits are taxable; above it, up to fifty or eighty-five per cent can be, depending on the tier.
6. Take the Massachusetts subtraction. Whatever Social Security amount was included federally under sec. 86, including the offset slice, is deducted under c. 62, sec. 2(a)(2)(H).
7. Check for a prior medical deduction. If any reimbursement repays medical expenses you itemized in an earlier year, that part is taxable to the extent of the earlier tax benefit.

Each Kind of Payment, Side by Side

Payment	Federal income tax	Massachusetts income tax	Where the rule is
Weekly total or partial incapacity benefits (c. 152, secs. 34, 35)	Excluded	Excluded	26 U.S.C. sec. 104(a)(1); c. 62, sec. 2(a)
Lump sum settlement of the comp claim (c. 152, sec. 48)	Generally excluded	Generally excluded	Same, as a redemption of compensation under the act
Comp equal to an SSDI reduction under 42 U.S.C. sec. 424a	Treated as Social Security; taxable only above the sec. 86 thresholds	Deducted	26 U.S.C. sec. 86(d)(3); c. 62, sec. 2(a)(2)(H)
Wages from light-duty work after returning	Taxable as wages	Taxable as wages	IRS Pub. 525
Employer or plan payments above the comp rate	Not comp; depends on who paid for the coverage	Follows the federal figure	Treas. Reg. 1.104-1(b); 26 U.S.C. secs. 104(a)(3), 105
Pension based on age, service or contributions	Taxable as pension income	Depends on the pension type	Treas. Reg. 1.104-1(b)
Third-party injury settlement for the same accident	Excluded for physical injury, under a different paragraph	Excluded	26 U.S.C. sec. 104(a)(2)

Key terms

• Workmen’s compensation act: the statutory phrase in 26 U.S.C. sec. 104(a)(1) for a law like M.G.L. c. 152 that pays employees for work injuries without proof of fault.
• Offset: the reduction the Social Security Administration makes to SSDI under 42 U.S.C. sec. 424a when disability benefits and comp together exceed the statutory cap.
• Average current earnings: the earnings figure sec. 424a uses to set the eighty per cent cap, drawn by formula from the worker’s own earnings history.
• Base amount: the income threshold in 26 U.S.C. sec. 86(c), $25,000 for most single filers and $32,000 on a joint return, below which Social Security benefits are not taxed.
• Lump sum agreement: a settlement under M.G.L. c. 152, sec. 48 that redeems some or all of the insurer’s liability for compensation in a single payment.
• Massachusetts gross income: the state tax base defined in M.G.L. c. 62, sec. 2(a) as federal gross income with listed additions and subtractions.

Three Situations, Worked Through

Comp only. A Worcester warehouse worker is out for eleven months on sec. 34 benefits and then settles under sec. 48. Neither the weekly checks nor the lump sum is income on either return. If the worker had no other income that year, there may be no filing requirement at all, which is a question for a preparer rather than a reason to report the comp.

Comp and SSDI, single filer. A Springfield roofer is approved for SSDI while still receiving sec. 34 benefits, and Social Security reduces the monthly SSDI check to keep the combined total under the sec. 424a cap. The SSA-1099 shows the offset as an addition in Box 3. With no other income, modified adjusted gross income plus half of the benefits stays below $25,000, so none of it is federally taxable despite the relabelling, and there is nothing for Massachusetts to subtract.

Comp and SSDI, working spouse. The same facts, but the roofer files jointly with a spouse earning a salary. Now the base amount of $32,000 is crossed, part of the Social Security total, including the relabelled comp, is federally taxable, and the Massachusetts return subtracts that included amount under c. 62, sec. 2(a)(2)(H). The comp insurer’s payments did not change at all; the tax result changed because of the household’s other income.

What the Tax Answer Does Not Change

The tax question sits beside the claim, not inside it. It does not change the weekly benefit rate, which chapter 152 sets from the average weekly wage before the injury; it does not change the duration limits in secs. 34 and 35; and it does not change how a third-party claim under c. 152, sec. 15 against a negligent driver or equipment maker works, although that recovery is excluded under a different paragraph, sec. 104(a)(2), with its own limits on punitive damages and emotional distress that are set out in whether a Massachusetts injury settlement is taxable. How long the benefits themselves run is covered in how long workers comp lasts in Massachusetts, and how the two disability programs interact before tax is ever considered is in the difference between workers comp and disability in Massachusetts.

Where the tax answer does matter to the claim is at settlement. Because the SSDI offset follows periodic comp and sec. 424a(b) spreads a lump sum that substitutes for periodic payments, the way a sec. 48 agreement describes the money can affect how long the Social Security reduction lasts, and therefore how much comp is relabelled for tax purposes in later years. That is a drafting question for the settlement, and it has to be answered before the agreement is approved, not on the next year’s return.

Frequently Asked Questions

Q: Is workers’ comp taxable in Massachusetts?

A: Generally no. Benefits paid under M.G.L. c. 152 are excluded from federal gross income by 26 U.S.C. sec. 104(a)(1), and Massachusetts gross income starts from federal gross income under c. 62, sec. 2(a), so they are not taxed by the state either. The exception is comp that reduces a Social Security Disability benefit, which is treated as Social Security for federal purposes and then subtracted on the Massachusetts return.

Q: Is a workers’ comp lump sum settlement taxable?

A: A lump sum under M.G.L. c. 152, sec. 48 redeems the insurer’s liability for compensation under the act, so it is generally excluded the same way the weekly benefits are. If you also receive SSDI, the way the settlement is written can affect how the Social Security offset is spread, and that can change how much comp is treated as Social Security in later tax years.

Q: Why does my SSA-1099 show more than I received from Social Security?

A: IRS Publication 915 explains that Box 3 of the SSA-1099 includes a “Workers’ compensation offset” addition when your benefits were reduced to stay within the combined limit for disability benefits and comp. Under 26 U.S.C. sec. 86(d)(3), that part of your comp is treated as a Social Security benefit, so Box 5 reports it even though Social Security never paid it to you.

Q: Will I actually owe tax on the offset amount?

A: Only if your income crosses the sec. 86 thresholds. Social Security benefits, including the relabelled comp, are taxable only where modified adjusted gross income plus half of the benefits exceeds $25,000 for most single filers or $32,000 on a joint return. Many people living on comp and a reduced SSDI check stay under that line; households with other earnings often do not.

Q: Does Massachusetts tax the Social Security offset part of my comp?

A: No. M.G.L. c. 62, sec. 2(a)(2)(H) deducts “Social security benefits included in federal gross income under section eighty-six of the Code,” and the offset slice is included federally only because sec. 86(d)(3) defines it as a Social Security benefit. The same dollars can therefore be federally taxable and removed on the state return.

Q: Are light-duty wages taxable while I am on partial comp?

A: Yes. IRS Publication 525 says salary payments you receive for performing light duties after qualifying for workers’ compensation are taxable as wages. The partial incapacity benefit under M.G.L. c. 152, sec. 35 paid alongside them stays excluded, so the same week can contain one taxable and one non-taxable payment.

Q: My employer kept paying my full salary. Is the extra taxable?

A: The part above what chapter 152 provides is not workers’ compensation. Treas. Reg. 1.104-1(b) excludes comp only up to the amount provided in the act, and anything beyond it is tested under the separate rules for accident and health benefits in 26 U.S.C. secs. 104(a)(3) and 105, which generally tax employer-funded payments.

Q: Do I have to report workers’ comp on my tax return?

A: Excluded comp is not reported as income on either return. What does have to be reported are the pieces outside the exclusion: wages, pension income, taxable employer payments, and Social Security benefits, including any relabelled offset amount, as figured on the sec. 86 worksheet.

Q: Is Jimmy Knows AI giving me legal advice?

A: No. This is general information about how federal and Massachusetts tax law treats workers’ compensation, not legal or tax advice, and reading it does not create an attorney-client relationship. The right answer for a specific return depends on every source of household income, how any settlement was written, and what the Social Security Administration actually reduced. For advice about a specific situation, speak with a Massachusetts attorney or a qualified tax professional.

Talking to a Lawyer

The tax question is usually the last one a person with a work injury asks, and it is the one where the answer was decided months earlier, in how the claim was paid and how any settlement was written. The weekly benefits are the easy part. The harder parts are whether Social Security will reduce a disability check because of the comp, for how long, and how a lump sum agreement describes the money it pays, because those facts decide how much comp is later treated as Social Security on a federal return.

Jim Glaser Law can be reached at (617) JIM-WINS. The line is answered 24 hours a day. The first telephone consultation is offered without charge. Cases accepted on a contingency basis carry no attorney fee unless there is a recovery, and case costs and expenses are addressed in the written fee agreement signed at intake.