Do I need to pay tax for IL state incomes when I didn’t work? I am on long term disability being paid by a 3rd company for this sick pay.

IL no. 

Federal, it depends. Long term disability may or may not be taxable depending on who paid the premium, or how much of it.

• If you had long term disability deducted from each paycheck when working, and your employer paid nothing, then the disability pay would not be taxable to you.
• If the employer paid some or all of the premium, then some or all would be taxable to you. If the employer paid half the premiums, then half would be taxable to you.

If you did not get a tax form for the income, it could be you paid the premiums in full and it is not taxable.

It was paid for by the employer. So I did expect to pay federal taxes. But when processing my return it’s showing that I owe Illinois taxes. Do you have a recommendation on how to fix this?

In reviewing this thread on this very subject, it seems that if the disability is shown on the W-2, then it will be taxed by IL, and the only solution is to get a corrected W-2. Please see the thread above for details.