Is Workers’ Comp Taxable in Illinois?

Are Workers’ Compensation Benefits Taxable in Illinois?

Under Illinois law, and federal law, workers’ compensation benefits are generally not taxable. That includes payments for medical care and wage replacement benefits. This tax-free status applies to most people receiving temporary or permanent disability benefits, whether they’re out of work for a short period or facing a long-term injury.

Why Aren’t Workers’ Comp Benefits Taxed?

Workers’ compensation is designed to replace lost income and pay for medical care resulting from a job-related injury. The IRS excludes these payments from taxable income because they serve as a safety net, not as earned income. Think of it as financial triage, not a paycheck.

Exceptions: When Workers’ Comp Might Be Taxable

While workers' comp benefits are typically non-taxable, exceptions exist. Situations where certain portions of workers' compensation benefits may become taxable include:

Social Security Disability Offset

If you receive both Social Security Disability Insurance (SSDI) and workers’ compensation, the Social Security Disability Offset may apply. This rule limits how much total income you can receive from both sources combined. If the cap is exceeded, part of your SSDI is reduced, and that portion of your workers' comp may become indirectly taxable.

If you're receiving a lump-sum settlement, it will likely be prorated across your remaining life expectancy to calculate the monthly equivalent for SSDI purposes. Payments made to cover medical costs or legal fees are typically excluded from the offset calculation.

Retirement Benefits

Workers’ compensation payments may be taxable if they’re considered retirement income—not injury compensation. This generally applies when benefits continue after you’ve reached retirement age and are no longer linked to a specific injury or illness.

Dual-Purpose Payments

If a settlement includes amounts that cover both lost wages and other expenses like pain and suffering or medical bills, the wage-related portion may need to be reported. It's not typically subject to federal income tax, but it may affect the amount of other benefits that are taxable.

Common Types of Workers’ Compensation Benefits That Are Generally Not Taxable

Workers' compensation insurance provides various types of non-taxable benefits to employees who suffer work-related injuries or illnesses. The benefits that are available can vary depending on the nature of the injury. 

The most common types of benefits provided by workers' compensation insurance in Bloomington, Illinois include:

Medical Benefits

Workers' comp insurance covers reasonable and necessary medical expenses related to work-related injuries or illnesses. This includes doctor's visits, hospital stays, surgeries, medications, diagnostic tests, physical therapy, and rehabilitation. The insurance typically pays for these expenses directly to the healthcare providers.

Wage Replacement Benefits

Wage replacement benefits aim to compensate employees for the wages lost due to their inability to work while recovering from a work-related injury or illness. There are different types of wage replacement benefits:

Temporary Total Disability (TTD) Benefits

If an employee is completely unable to work for a temporary period, they may be eligible for TTD benefits. These benefits generally provide a portion of the employee's average weekly wage until they can return to work or reach maximum medical improvement.

Temporary Partial Disability (TPD) Benefits

TPD benefits are available when an employee can work but at a reduced capacity or with certain work restrictions due to their injury or illness. These benefits provide compensation for the wage loss experienced due to the reduced work capacity.

Permanent Partial Disability (PPD) Benefits

PPD benefits are available when an employee has reached maximum medical improvement but still experiences a permanent impairment or disability. The benefits are based on the nature and extent of the impairment and may be paid as a lump sum or in periodic payments.

Permanent Total Disability (PTD) Benefits

PTD benefits are available when an employee is permanently unable to work in any capacity due to their work-related injury or illness. These benefits provide ongoing compensation for the loss of earning capacity.

Vocational Rehabilitation

Vocational rehabilitation benefits are provided to injured employees who require assistance in returning to suitable employment. These benefits may include job placement services, job training, career counseling, and vocational retraining programs.

Death Benefits

If a work-related injury or illness results in the death of an employee, workers' compensation insurance typically provides death benefits to the employee's dependents. These benefits may include compensation for funeral expenses and ongoing financial support to the dependents.

Travel Expenses

In some cases, workers' comp insurance may cover travel expenses related to medical appointments, treatments, or vocational rehabilitation. This can include reimbursement for mileage, transportation costs, and lodging if necessary.

The duration and amount of workers’ comp benefits available to you may be subject to limitations or caps set by state laws.

A workers' compensation attorney will help you understand how workers’ comp works in Illinois, guide you through the work injury claim process, explain the specific benefits available in your situation, and help you navigate any challenges that may arise.

Reporting Workers' Comp Benefits on Your Income Taxes

Even though workers' compensation benefits are generally non-taxable, it is still important to report them accurately on your tax returns. Here are some key points to keep in mind.

​​Do You Get a 1099 for Workers’ Comp?

Usually, no. Workers’ comp isn’t reported on a W-2 or 1099 unless there’s a taxable component—like in cases involving SSDI offsets or structured settlements that generate taxable interest.

Do You Still Report Workers’ Comp Benefits?

You may need to disclose your benefits if requested, especially if you’re applying for other government assistance or dealing with offset rules. When in doubt, consult a tax advisor.

Tax Consequences That Might Apply When You Receive Workers’ Compensation Benefits

While workers' compensation benefits themselves are typically non-taxable, there are tax consequences to consider in certain situations. These consequences are usually indirect and may affect other aspects of your tax situation.

Deductibility of Medical Expenses

If you are claiming medical expenses related to your work-related injury or illness, it is essential to understand the rules surrounding the deductibility of these expenses. Depending on your overall medical expenses and other factors, you may be able to deduct a portion of these expenses on your tax return.

Impact on Other Benefits

Receiving workers' comp benefits may impact other government benefits you are entitled to, such as unemployment compensation or disability benefits. These benefits may have their own tax implications, so it is crucial to understand the interplay between different benefit programs and their tax consequences.

Settlements and Structured Payments

In some cases, workers' compensation claims are resolved through lump-sum settlements or structured payments. These arrangements may have specific tax implications, such as potential tax on interest earned or taxable income resulting from investment or annuity payments. Consultation with a tax professional is recommended in these situations.

Should You Get Professional Tax Advice About Workers’ Comp Benefits in Illinois?

Absolutely. While workers' compensation benefits are generally non-taxable, individual circumstances can vary and understanding the fine print is critical. Your workers’ compensation attorney in Bloomington may recommend that you seek advice from a tax professional to ensure compliance with tax regulations and accurately determine tax obligations. If you're dealing with SSDI, a structured settlement, or nearing retirement, a tax professional should be part of your strategy.

Get Help with Your Workers’ Comp Case in Bloomington

If you’ve been injured on the job and have questions about the benefits you’re entitled to receive, or how they could affect your taxes, Strong Law Offices in Bloomington, IL is here to help. Contact us today for a free consultation. We'll help you protect your rights and make sound financial decisions during your recovery.