How to report wages and workers compensation combined income on W-2? The taxpayer received $20K workers comp & $80K wages. The employer issued W2 showing wages $100K.

[Chris_4325]

How to report wages and workers compensation combined income on W-2? The taxpayer received $20K workers compensation and $80K wages. The employer issued W2 showing wages $100K. The employer issued this written statement: The amount identified below as “excludable compensation” is in lieu of worker’s compensation and has been determined to be excludable from taxable income by IRS Technical Advice Memorandum TR 32-153-91

[Karen_pdx]

Does the taxpayer happen to be a police officer injured in the line of duty? I've seen another post that referred to the same TAM, but the TAM number seems to be incorrect. In the other post (on the ProSeries community) https://accountants.intuit.com/community/proseries-tax-discussions/discussion/excludable-compensatio...

the taxpayer was a police officer and it appeared the employer did that same thing and referred to that same TAM number. But that TAM doesn't show up in the research services. 

It seems like the best course of action from the taxpayer's point of view is to ask the employer to correct the W-2 so the nontaxable compensation is not reported in Box 1 of the W-2. It seems like the nontaxable wages would then be shown in Box 12, Code J as Sick Pay, probably.

Even if you think the exclusion advice from the employer is correct, if you just manually reduce the wages in the program, the taxpayer will almost certainly receive a matching notice when the wages don't match the W-2. And there's no subtraction on the Schedule 1 that seems to match the situation, likely because the IRS would expect all wages in Box 1 to be taxable wages. Forcing it on to Line 24z of Schedule 1 will probably mean paper filing since the instructions for that line say to leave Line 24z blank and using that line could trigger an inquiry from the IRS since it would be unexpected.

If the employer won't correct the W-2, the IRS has a process for requesting IRS assistance with an incorrect W-2

https://www.irs.gov/faqs/irs-procedures/w-2-additional-incorrect-lost-non-receipt-omitted/w-2-additi....

Hope this helps.

[Chris_4325]

Thank you for the answer.

The taxpayer is a police officer injured on the job. I try to have W-2 corrected but it might be difficult thing to do. If that does not work I would adjust income on Schedule 1 with description: NONTAXABLE WORKERS COMPENSATION BENEFITS INCLUDED IN WAGES. I would also attach written statement from employer confirming the excludable compensation. My software will allow this entry and pdf attachment.

[Karen_pdx]

Your approach seems reasonable and allows the taxpayer to file regardless of the employer's response. You might want to ask the taxpayer to sign a Form 8821 so you could directly receive copies of any notices the IRS sends, allowing timely response without relying on the taxpayer to forward a notice promptly.