Is Vermont Workers’ Compensation Taxable?

At tax time, clients often ask us if they owe taxes on money they got from a workers’ compensation claim in 2025. We also get this same question about personal injury settlements and Social Security disability benefits.

• Is workers' compensation money considered taxable income? 
• Do you need to pay tax on a personal injury settlement or Social Security disability payments that you got last year? 
• Should you include this money on your state or federal tax return?

Please note that we are not tax specialists, so be sure to talk to a certified public accountant or a lawyer who specializes in tax issues if you have specific questions or concerns. See our blog post on free tax help for information about getting help with your taxes if you are elderly or income eligible.

The summary

While we at BFS are not tax professionals, we can confirm that in Vermont, the following is true:

• You do not owe any state or federal income tax on workers’ compensation payments or a workers’ compensation settlement.
• In most personal injury settlements, you do not have to pay Vermont or federal income tax. But there are some rare exceptions, so you should talk with a tax professional to be sure.
• Social Security disability payments (like Social Security retirement benefits) ARE subject to income tax at the state and federal level.

Are Vermont workers’ compensation payments taxed?

Money can be tight after a work injury, but there is one bright spot: The State of Vermont and the IRS do not count money that you are paid from a workers’ compensation claim as taxable income. This means that you don’t owe any taxes on your weekly wage replacement checks or on a lump sum payment (if you decide to settle your claim).

Because workers’ compensation is not considered to be taxable income, you don’t need to include it on your tax return. You won’t get a W-2 for your workers’ compensation benefits and you don't need one to file your taxes. But keep in mind that workers' compensation money is considered unearned income, which means that it can affect your income eligibility for some Vermont tax credit programs, such as the Renter Credit and the Property Tax Credit.

Are personal injury settlements taxed?

In almost all cases, money from a personal injury settlement is not taxable in Vermont. This money is meant to compensate you for personal losses arising from an injury by helping to cover your medical bills, loss of earning capacity, and more.

Be aware, though, that there are some unusual situations where PI settlement money can be taxable. This can include money paid for lost wages, for medical expenses if deducted in a prior year's tax return, for punitive damages, and for emotional damages if there is no physical injury. You should consult a tax specialist to help you understand whether any part of your PI settlement might be taxable.

Are Social Security disability benefits taxed?

In Vermont, Social Security disability benefits are taxed, but not in the same way as most other income. The amount you owe depends on three factors:

1. Do you have other sources of income? If your income is low, you likely won’t owe any tax. But if you have other income that puts you over a certain threshold, then part of your Social Security disability benefits may be taxed. According to the Social Security Administration, you will pay federal income taxes on your benefits if your combined income (50% of your benefit amount plus any other earned income) exceeds $25,000/year filing individually or $32,000/year filing jointly.
2. Do your Social Security benefits cover more than one tax year? If you got a large, lump-sum check for retroactive benefits that cover more than one year, this might affect how much tax you pay. Consult with a tax specialist—such as a certified public accountant (CPA) or a lawyer who specializes in tax issues—to see if you will owe tax on any portion of that amount.
3. Did you also get workers’ compensation benefits? See the section below on receiving both types of payments.

What if I get workers’ compensation benefits AND Social Security disability payments?

If you’re getting paid both workers’ compensation benefits and Social Security disability benefits (SSDI), your SSDI benefits might be reduced (offset) by the amount of your workers’ compensation payments. The offset amount could then be taxable.

In this situation, you might get a 1099 form from the Social Security Administration (SSA) that shows you owe taxes for money that the SSA never actually paid you because it was offset due to workers’ compensation payments. This is a harsh result but remember this: if the only “income” you had for tax purposes was the unearned SSDI, it may be below the threshold for paying state and federal taxes. It is important to check with a tax professional.

Dealing with two types of benefits (workers’ compensation and Social Security disability) is complicated. It's often helpful to talk to an attorney who understands both types of claims. At BFS, we have years of experience helping clients in this situation. We can help you structure your workers’ compensation settlement to minimize the offset and maximize the amount of money you get to keep.

Don't delay

Tax returns are due Wednesday, April 15, 2026, so don’t delay. If you are in any doubt about whether you owe tax on your workers’ compensation benefit payments, personal injury settlement, or Social Security disability benefits, contact a CPA, a tax attorney, or a free tax preparation service soon.

If you have questions about filing a workers’ compensation or personal injury claim, call or text us at 802-229-5146 to schedule a free case evaluation today.