When you file your taxes, you must include payments received from your employer or private insurance in your taxable income. Government payments made under a worker's compensation act are not taxable; however, the Internal Revenue Service does not exclude from taxation alternative arrangements that compensate disabled workers with private monies. The IRS taxes these private benefits in the same manner that ordinary income is taxed.
Gather your documentation on payments made to you by your employer or private insurance to compensate for your injury or illness. Your employer will include these amounts in box 1 on Form W-2.
Gather your tax forms together. You can order Form 1040 and instructions from the IRS by calling 800-TAX-FORM; or you can download the forms from the IRS website (see Resources). You can also e-file your taxes through the IRS website.
Enter your W-2 income on line 7 of Form 1040. The amount entered on this line will include taxable worker's compensation payments you received.
Include your worker's compensation payments in your total income reported on line 22 of Form 1040.
Determine your taxable income after adjustments, deductions and exemptions on line 43 of Form 1040.
Pay the tax you owe by submitting your completed Form 1040 with a check or money order payable to "United States Treasury" to the IRS.