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.
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