I had my taxes figured today. I got 2 BP checks, one for replacement of income and one as a Final Payment to end their liability. The tax preparer said, sense the Final Payment is not replacement of income, I did not have to pay FICA and medicare tax on it. I told him I don't want to be the only one in the country to do this.
Does this sound proper? Anyone else treating it this way?
Thanks, Lamont
If a payment is not a replacement for lost wages, lost business income or lost profits, then no social security or medicare tax or self-employment tax is due.
In some situations, even replacement of lost wages would not be subject to soc. sec. or medicare taxes. E.g., a payment from your own employer for lost wages would be subject to the forementioned taxes. A payment from a third party to you to satisfy an obligation of your employer would also be subject to the forementioned taxes. A payment from BP to you for lost wages because you were laid off because of the oil spill would not be subject to the forementioned taxes.
All of the above payments for lost wages, lost business income or profits would all be taxable gross income.
Why the third point? It seems illogical.
Payment from a third party not acting to satisfy your employer's obligation fails to meet the definition of "wages" for FICA and Medicare taxes.
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