To be excludable as worker’s compensation (WC), the payments must be paid to compensate for occupational personal injury or sickness. However, if the payments are computed and paid using the employee’s age or length of service, they are not excludable. Payments which compensate for medical expenses which had formerly been deducted must be included in gross income. Even WC payments made to the survivors of an employee can be excluded from income.

The exclusion doesn’t apply to job-related payments that exceed the amounts provided in the applicable WC act. However, excess payments are excludable, if they are received under a special law providing for special payments supplemental to WC.

A “worker's compensation act” provides fixed awards to employees (or their dependents) for employment-related accidents or illness, regardless of fault. To qualify as “in the nature of WC” an act must pay benefits only for job related injuries or sickness cases.