Damages on account of personal injury are not “income” for income tax purposes under Internal Revenue Code § 104, even if part of the award is for lost wages. It has long been assumed, though without express statutory authority, that such damage awards were also not “wages” or “compensation” for purposes of employment taxes, including FICA, Medicare, and Railroad Retirement taxes. Recently, however, BNSF Railway has withheld Railroad Retirement taxes from payments to injured workers in satisfaction of FELA judgments. BNSF argued, with support from the United States as amicus curiae, that such payments are “compensation” under the Railroad Retirement Tax Act. The supreme courts of Nebraska and Iowa have agreed.

A federal district court recently held that FELA damages on account of personal injury are not subject to RRTA withholding. Cowden v. BNSF Ry. Co., 4:08CV01534 ERW (E.D. Mo. July 7, 2014). The court took note of a recent article by CCL Senior Counsel Jeffrey R. White, The Taxman Cometh . . . To Your FELA Judgment, TRIAL, Apr. 2014, at 16, analyzing this issue. The court determined that FELA damages for lost income could be “compensation.” However, as detailed in the Trial article, “income” is broader than “compensation” and plaintiff’s entire award is excluded from income by section 104. The district court concluded that BNSF improperly withheld Railroad Retirement taxes from its payment in satisfaction of plaintiff’s FELA judgment.