Gulf Coast Tax Attorney Says BP Oil Spill Payments for Lost Wages are Taxable

A significant number of individuals in New Orleans and other parts of Southern Louisiana and Mississippi have received payments for lost wages as a result of the Deepwater Horizon BP Oil Spill.  It seems established that the payments will be taxable as income.  However, very different tax consequences are possible depending on whether the individual is an employee or is self employed.  For self employed individuals, the IRS takes the position that the payment should be included in gross income, which would make the BP payment subject to the self employment tax.

See Gulf Oil Spill: Questions and Answers, Updated: June 25, 2010, at http://www.irs.gov/pub/irs-pdf/p4873a.pdf.

However, for employees, the IRS excludes the payment from the definition of wages, reasoning that the payments are not wages under the “social security tax and Medicare tax because it is not an actual payment for employment.”  Id.  The result is that self employed individuals will have a higher employment tax obligation than their employee counterparts.  Why the different treatment by the IRS is not clear, but the result under the IRS guidance does appear equitable.  Please note that the tax court has held that certain business interruption payments are not self employment income, and because the BP payments seem similar to business interruption payments, authority may exist for self employed individuals to treat the BP Payment as non-self employment income.  If this issue is analyzed and properly reported under the guidance of a qualified tax professional, self employed individuals could take this position on their 1040, contrary to the IRS guidance.

For a general discussion of the Oil Spill tax issues, See: Tax Issues and the Gulf of Mexico Oil Spill, at http://www.nationalaglawcenter.org/assets/crs/R41323.pdf.

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