Protein polymer-based hydrogels have shown potential for tissue engineering applications, but require biocompatibility testing for in vivo use. Enzymatically crosslinked protein polymer-based hydrogels were tested in vitro and in vivo to evaluate their biocompatibility. Endotoxins present in the hydrogel were removed by Trition X-114 phase separation. The reduction of endotoxins decreased TNF-α production by a macrophage cell line in vitro; however, significant inflammatory response was still present compared to collagen control gels. A branched PEG molecule and dexamethasone were added to the hydrogel to reduce the response. In vitro testing showed a decrease in the TNF-α levels with the addition of dexamethasone. In vivo implantations into the epididymal fat pad of C57/BL6 mice, however, indicated a decreased inflammatory mediated immune response with a hydrogel treated with both PEGylation and endotoxin reduction. This study demonstrates the importance of endotoxin testing and removal in determining the biocompatibility of biomaterials.