How Workers’ Compensation Benefits Affect Your Taxes
If you were injured on the job and received workers’ compensation benefits, you may be wondering whether those payments count as taxable income. This is a common — and important — question for injured Illinois workers, especially if you’re planning a settlement or already receiving benefits. Below, our Chicago workers’ compensation lawyers explain how workers’ comp impacts your taxes, when benefits may become taxable, and what the law says.
Is Workers’ Compensation Considered Taxable Income?
In Illinois, most workers’ compensation benefits are not taxable. While workers’ compensation payments are considered income, the IRS generally treats them as tax-exempt. This includes wage replacement benefits, medical benefits, and most settlements paid under the Illinois Workers’ Compensation Act.
The Illinois Workers’ Compensation Act requires employers to provide benefits for employees injured in the course of their employment, including medical care and a portion of lost wages. You can review the statute directly under The Illinois Workers’ Compensation Act, 820 ILCS 305.
Because these benefits are paid pursuant to state law, they are generally excluded from federal taxable income under IRS rules.
When Can Workers’ Compensation Benefits Become Taxable?
There are limited situations where a portion of your workers’ compensation benefits may be taxed. This most often occurs when an injured worker is also receiving Social Security Disability (SSD) benefits.
If your combined workers’ compensation and SSD benefits exceed 80% of your pre-injury earnings, the Social Security Administration may reduce your SSD payments. In that situation, a portion of your workers’ compensation benefits may be treated as taxable income for federal tax purposes.
This issue commonly arises in cases involving permanent disability or long-term injuries. Our attorneys regularly advise injured workers on how settlements may interact with SSD benefits. You can learn more about benefit coordination on our Illinois workers’ compensation page.
Do You Have to Report Workers’ Comp to the IRS?
In most cases, you do not need to report workers’ compensation benefits on your tax return. However, if you are receiving SSD benefits or have structured a settlement in a particular way, reporting requirements may apply.
Because tax consequences depend on your individual circumstances, injured workers should speak with a qualified tax professional before filing. A workers’ compensation lawyer can also help ensure your settlement is structured in a way that minimizes unnecessary tax exposure.
Talk to a Chicago Workers’ Compensation Lawyer
Most workers’ compensation benefits and settlements are not taxable, but exceptions do exist. If you were injured at work and have questions about your benefits, taxes, or settlement options, our attorneys can help.
For more than 25 years, McHargue & Jones, LLC has represented injured workers throughout Chicago and Illinois. If you need help filing a workers’ compensation claim or protecting your benefits, contact us today for a free consultation.
Call (312) 739-0000 or contact us online to speak with a lawyer.
