NLIC.org

Edward Said:

What should I do if I paid taxes on disability insurance and it should have been worker's compensation.?

We Answered:

No, the income is taxable because the source of the money was the disability insurance which was not paid with after tax dollars on your part. Had it been disability insurance that you paid for with after tax dollars, then it would be tax free.

The workers comp thing is a side issue. Any money you got from a workers comp claim might be tax free, but this money did not come from a workers comp claim. In most cases the same insurance company does not handle both lines for an employer. The workers comp carrier was probably not the same as the disability carrier.

If they subrogate and win, yes "Just Me" is correct. A 1040X may be required to fix the issue.