Payroll Taxes Not Properly Withheld From Jury Verdict For Railroad Worker According To Missouri Federal Court

Last Fall, a jury in the U.S. District Court for the Eastern District of Missouri awarded a railroad employee a verdict of nearly $1.7 million after a train “bottomed out” and ejected him.  Yesterday, the court had to determine whether the railroad properly withheld payroll taxes to be tendered to the U.S. Treasury from the amount of the verdict.  Specifically, was a general verdict issued under the Federal Employers’ Liability Act (FELA) subject to the taxation language within the Railroad Retirement Tax Act (RRTA) that provides, “there is … imposed on the income of each employee a tax equal to the applicable percentage of the compensation received during any calendar year by such employee for services rendered by such employee.”  See 26 U.S.C. § 3201(a)-(b).

Although some courts have concluded that FELA verdicts are subject to RRTA taxation, this court decided that the Congress did not intend to tax personal injury judgments under the RRTA and ruled that the railroad should not have withheld any amounts from the total verdict award for the payment of payroll taxes.  The court found that a FELA award of lost pay falls within the definition of “compensation” under the RRTA, but that the plaintiff’s entire verdict in this case qualifies for the personal injury exclusion from income contained in 26 U.S.C. § 104 (even if the award included an amount for lost earnings).