Supreme Court: Lost wages awarded for work-related railroad injuries are taxable

Tax Hot Topics newsletter The U.S. Supreme Court held in BNSF Railway Company v. Michael D. Loos, 586 U.S. ___ (2019) that lost wages awarded to a railroad employee for work-related injuries are taxable and subject to payroll tax withholding under the Railroad Retirement Tax Act (RRTA). The Supreme Court’s decision reverses the initial U.S. District Court of Minnesota ruling, which was affirmed by the Eighth Circuit Court of Appeals.

Michael Loos was an employee of BNSF Railway Company who was injured while working at the company’s railyard. Loos sued BNSF under the Federal Employers’ Liability Act (FELA) and received a jury verdict of $126,212.78 in damages, of which $30,000 was ascribed to wages lost during the time Loos was unable to work. BNSF asserted that the lost wages awarded to Loos constituted “compensation” taxable under the RRTA, and asked to withhold $3,765 of the $30,000 to cover Loos’ share of the RRTA taxes.

Similar to the Federal Insurance Contributions Act (FICA), the RRTA imposes taxes on employees and employers within the railroad industry based on employees’ compensation, with the tax proceeds used to fund the pensions and other benefits of railroad employees. Under Section 3231(e), compensation for RRTA purposes is defined as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.”

The Supreme Court first examined the definition of compensation under the RRTA and the Railroad Retirement Act (RRA), a sister statute to the RRTA that entitles railroad workers to various benefits and prescribes eligibility requirements. Both statutes define compensation as stated above under Section 3231(e). The court then noted that the IRS has consistently interpreted the term “compensation” to include pay for periods of absence, including time lost, in various regulations.

The Supreme Court also compared the statutory language defining compensation under RRTA to wages under FICA, both of which were enacted by the same Congress in the 1930s. Under Section 3121(a), FICA wages are defined to include “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash…” Because of the similarity in the definitions, the Court also relied on several earlier Supreme Court cases where FICA wages were held to include pay received during absences of employment, including severance payments and back pay awards.

Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director, Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate, Washington National Tax Office
T +1 202 861 4107

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.