If any employees sustain injuries and can’t work, your company may end up compensating them. If so, take the time to double-check entries on Form W-2.
Payments to injured employees may be taxable or nontaxable income based on various factors.
Getting the details wrong can turn a messy situation into a disaster.
A recent example can be found in Doherty v. Turner Broadcasting Systems Inc.
Employee Martin Doherty sued the media corporation, claiming it’d willfully filed false W-2s with the IRS for tax years 2014, 2015 and 2016.
What happened? The photojournalist injured himself on the job. At various times during the tax years in question, he couldn’t work, and the company paid him for his leave.
Turner Broadcasting Systems had two relevant paid leave policies for injured or ill employees.
First, under its workers’ compensation policy, an employee who experiences a job-related injury or illness would stay on the payroll for 26 weeks. These individuals would be paid a percentage of their base salaries as follows:
- 100% – weeks 1-10
- 80% – weeks 11-16, and
- 60% (with necessary adjustments made for state law) – weeks 17-26.
Short-term disability leave was the second policy. This was for injuries or illnesses making it medically necessary for someone to be out of work for seven days or longer for their own medical needs.
The same percentages of salary would be paid. However, the contingency regarding state law, for weeks 17-26, wouldn’t apply.
Of note, for payments made under the short-term disability leave policy, the corporation could claim federal tax deductions.
Filling out Form W-2
According to Doherty, the payments he received were workers’ compensation and should have been included as nontaxable income on Form W-2. However, the company reported the earnings as short-term disability – i.e., taxable income on Form W-2. As a result, the company overstated his taxable income on the annual information returns, he claimed in his lawsuit.
At first, a federal district court ruled in the employer’s favor.
But on appeal, the employer didn’t fare as well.
For starters, the district court had concluded the W-2s weren’t false in that they accurately reflected the total amounts paid to the employee for each tax year. However, the problem wasn’t the amounts, the higher court reasoned, but the fact that they were added to box 1 of the W-2s as taxable income.
After all, the company should have known the payments were nontaxable income since the employee filed a workers’ comp claim, which was determined to be work-related, and the company was aware of it.
Next, while the lower court ruled that Turner Broadcasting Systems didn’t act knowingly and recklessly, the D.C. Circuit Court of Appeals wasn’t convinced.
For example, the appeals court pointed out that in 2016, the employee sent an email to the Payroll department, requesting a corrected Form W-2. He put in that request, noting that workers’ comp is nontaxable. The Form W-2 entries in question went beyond mere errors, the court explained.
Given the appeals court’s findings, it sent the case back down to the district court for further proceedings.