On September 18, 2025, the Illinois Supreme Court handed down its decision in Bitner v. City of Pekin, 2025 IL 131039 which ruled that contrary to the common practices of municipalities all across Illinois for more than two decades, an employer is not prohibited from withholding employment taxes on benefits paid pursuant to the Illinois Public Employee Disability Act. Keep reading to learn more about what PEDA Attorney, Brent Eames, says about this extremely significant legal development, and what you may need to do to make sure your benefits are unaffected.
The Public Employee Disability Act provides that any eligible employee who suffers any injury in the line of duty which causes them to be unable to perform their duties shall continue to be paid their full salary with no deduction from sick leave credits, compensatory time for overtime accumulations or vacation, and service credits in a public employee pension fund during the time he/she is unable to perform their duties due to the result of the injury for up to 365 days for the same injury.
Under Internal Revenue Code (IRC) Section 104(a)(1), workers’ compensation benefits are explicitly excluded from gross income and are therefore not taxable. Notably, Treasury Regulation §31.3121(a)(2)-1 specifies that payments made under a statute similar to a workers’ compensation act are excluded from the definition of “wages” for Federal Insurance Contributions Act (FICA) tax purposes. It seems obvious that PEDA benefits are, “in the nature of a workers’ compensation act,” and thus, should not be considered “wages” under the FICA definition. Nevertheless, given that the tax code does not specifically reference PEDA, there has traditionally been some confusion from municipalities as to whether these PEDA benefits are subject to the withholding of traditional employment taxes. The Supreme Court has now confirmed that an employer is not prohibited from doing so.
In Bitner, during the time the complaining police officers were eligible for PEDA benefits following work-related injuries, the defendant left the officers on their normal payroll, which included the withholding of the normal employment taxes. The plaintiffs sued their employer, arguing that this violated the law given that PEDA is supposed to be tax free. The case made it all the way to the Illinois Supreme Court.
The Supreme Court ruled that employers are not prohibited from withholding taxes from an injured first responder’s PEDA benefits. The Court held that the withholding of taxes is not a question about receiving the amounts owed but, rather, about how PEDA payments are administered. Given the administrative burden allegedly placed on public employers to determine when employment taxes should be withheld from payments, the Court concluded that the employee’s tax liability should be his or her own responsibility. The Court held that this taxation question is better left between the employee and the IRS.
It is important to note that the Supreme Court did not make any ruling or determination that PEDA payments are subject to federal income tax. The Court confirmed that if PEDA benefits are meant to be tax free, the employee must seek a refund from the IRS or adjust his tax withholding by submitting a new W-4 withholding form to his employer. Essentially, the Supreme Court’s ruling removes the burden of answering the tax question from the employer and reassigns it to the employee. This will certainly create additional work for injured first responders to ensure they are not being unjustly taxed on duty-related benefits.
Eames Law Group handles all aspects of workers’ compensation and personal injury claims for police officers, firefighters, EMTs, sheriff deputies and correctional officers. Brent Eames is experienced in handling claims for workers’ compensation, disability pensions, PEDA, PSEBA and civil personal injuries. If you are an injured first responder, you owe it to yourself to contact an attorney who has frequently been recognized as among the best workers’ compensation attorneys in Illinois.
Please contact us at Eames Law Group, Ltd. to discuss your rights and protect your benefits.
