Awarded Back Pay

[Burke]

Yes, I am thoroughly confused as well but want to make sure I am handling correctly for the taxpayer. It logically makes sense that all income would be taxable in the year received; just not sure why city would report as they are and want to make sure there are no exceptions regarding the reporting of income that I am not aware of.

Peggy Sioux

It appears to me from the link to Pub 957 that this payment was not made under a statute and therefore is possibly not allocated to back years. All wages reported in 2016 for both income tax and FICA purposes. However, you indicate he was not employed under Social Security. Civil Service then?

[peggysioux]

Awarded Back Pay

It appears to me from the link to Pub 957 that this payment was not made under a statute and therefore is possibly not allocated to back years. All wages reported in 2016 for both income tax and FICA purposes. However, you indicate he was not employed under Social Security. Civil Service then?

Yes taxpayer is civil servant and I would think all wages should be reported in 2016; however that is not how employer (large city) is handling.

[tkellyesq]

In California, police officers who file a workers compensation claim which is not immediately accepted will have to use their own leave balances to take time off.

When the claim is subsequently accepted, the officers personal leave balances are then restored to him, and the pay he received from the date of acceptance of the industrial injury claim is then deemed to have been paid under California Labor Code § 4850. Perhaps this is what has been viewed as "back-wages."

As this section is a statute in the nature of a workers compensation act, the amounts paid under LC § 4850 are tax-free under IRC § 104(a)(1).

Consequently the municipality will issue revised W-2s reducing taxable income by the amount wages for which LC § 4850 time is now deemed to have been paid.

These corrected W-2s may span several years. The tell-tale sign is that the Box 1 and Box 17 amounts on the corrected W-2 have been reduced from the original, sometimes very substantially.

This is very common. And if this is the case, just file amended returns and the taxpayer will have refunds and some interest due to the reduction in taxable wages.

[tkellyesq]

To continue, if the "case" you refer to is an adverse one, and the officer was actually awarded back-pay as a part of a settlement, then the City's actions are mystifying.

I have handled many of these types of cases and just as has been discussed, a cash-basis taxpayer reports wages, including back-wages when received. I am unaware of an exception to this standard for ordinary wages for income tax purposes.