27 Apr, 2023

Is Workers’ Comp Taxable in Illinois?

Author Todd A. Strong

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

cropped view of businessman sitting at table and giving paper sheet to worker. Concept of is workers' comp taxable
cropped view of businessman sitting at table and giving paper sheet to worker. Concept of is workers' comp taxable

The General Rule: Workers' Comp Is Non-Taxable

In general, workers' compensation benefits in Illinois are considered non-taxable at both the federal and state levels. The Internal Revenue Service (IRS) does not classify workers' comp benefits as taxable income to ensure that injured workers have the opportunity to receive the full extent of the financial support they need after a workplace accident. This non-taxable status applies to wage replacement benefits as well as medical benefits received through the workers' compensation program.

Exceptions to the Rule: When Is Workers’ Compensation Considered Taxable? 

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

Social Security Disability Offset

If an individual receives Social Security Disability Insurance (SSDI) benefits and workers' compensation simultaneously, a portion of their workers' comp benefits may be subject to taxation. This is known as the "Social Security Disability Offset" rule. The taxable amount is determined based on a formula that considers the total disability benefits received.

If you received a lump sum workers’ compensation settlement, the amount will be prorated to reflect the monthly amount that would have been received. Payments for work-related medical expenses and legal fees are not included under the offset rule. 

Retirement Benefits

In some cases, workers' compensation benefits received after reaching the retirement age may be subject to taxation. This can occur when workers' comp benefits are considered "replacement income" rather than compensation for a specific work-related injury.

Dual-Purpose Payments

In certain cases, workers' compensation benefits may include amounts that serve multiple purposes, such as covering medical expenses and lost wages. If the portion allocated to lost wages is taxable, it must be reported as such.

Even if workers' compensation benefits are considered taxable in certain situations, they are still excluded from federal income tax. Instead, they are subject to a federal tax offset. The benefits are not taxed, but they may impact the amount of other benefits that are taxable.

What Types of Benefits Are Provided by Workers’ Compensation in Bloomington, Illinois?

Workers' compensation insurance provides various types of 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 to ensure that you obtain the benefits you are entitled to receive.

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:

Receiving Form 1099

If you receive workers' compensation benefits, your employer or the insurance company may issue a Form 1099 for reporting purposes. This form will provide details about the benefits received during the tax year.

Reporting Workers’ Comp Benefits

Workers' comp benefits should be reported on your income tax return, even though they are typically non-taxable. The tax forms you need to use will depend on your filing status and other factors. 

Tax Year of Benefits

Report workers' comp benefits in the tax year they are received, even if they were meant to cover a different period. For example, if you receive a lump-sum settlement covering multiple years, report it in the year you receive the payment.

Record Keeping

Maintaining accurate and organized records is crucial when it comes to reporting workers' compensation benefits. Keep copies of all relevant documents, such as Form 1099, medical bills, settlement agreements, and any correspondence related to your workers' comp claim. These records will help you accurately report your benefits and substantiate any deductions or credits claimed.

IRS Resources 

The Internal Revenue Service (IRS) provides a wealth of resources to help injured workers understand their tax obligations and correctly report their income. Visit the IRS website for publications, forms, instructions, and other resources related to reporting workers' comp benefits and other income.

Potential Tax Consequences When You Receive Workers’ Compensation Benefits

While workers' compensation benefits themselves are typically non-taxable, there are potential 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?

While workers' compensation benefits are generally non-taxable, individual circumstances can vary. Your workers’ compensation attorney in Bloomington may recommend that you seek advice from a tax professional or accountant to ensure compliance with tax regulations and accurately determine tax obligations. 

Understanding the tax implications that accompany receiving workers’ comp in Illinois can help you effectively plan and make informed financial decisions based on your specific circumstances.

About The Author

Photo of Todd A. Strong
Illinois workers’ compensation and personal injury lawyer Todd A. Strong is the founder of Strong Law Offices in Peoria, Illinois. Todd brings considerable legal knowledge, experience, and skill to the table to ensure injured victims throughout the state are treated with respect, dignity, and fairness.