I received an award for lost earnings due to an injury that permanently disabled me.
The lost earnings portion of my award were offset by the SS and Fed and State Taxes.

I have petitioned the SSA to include my lost earnings award on my SSA earnings record.
They recently sent me a letter and denied my request, stating "no actual earnings were paid to you"
and they claim that "no taxes were ever paid to any government entity."

I am appealing this decision, and have been looking for more evidenciary citations
besides SSA Handbook 1812.C which states "Any back pay recovered in a wage claim does count for the earnings test.'

Any advice you 2 can give, will be much appreciated.

best regards

John

Hi John. You appear to be confusing the earnings test with the question of Social Security coverage. Any regulations in the Social Security Handbook or POMS that refer to the “earnings test” are specifically addressing the rules regarding the limit on earnings that a person can have and still be able to collect benefits prior to full retirement age (FRA). Therefore, the Handbook section you reference is irrelevant to the question of whether or not the payment you received from your award should be posted to your Social Security earnings record.

The Social Security regulations governing the coverage of earnings (i.e. whether or not income is subject to Social Security taxes) have nothing to do with the earnings test. Deciding whether or not income is covered for Social Security tax purposes, which is what determines whether or not the income gets posted to the person’s SS earnings record, is a much more complex issue. Those regulations are outlined in section RS 01400 ff of Social Security's operations manual (POMS).

First, in order for income to be counted as covered earnings, it must be earned in the person’s capacity as either an employee or self-employed individual. Even then, wages can be exempt from SS taxes if they are specifically excepted from coverage, as is the case with the wages of some government employees. In other words, even if something is wages it doesn’t go on the person’s Social Security earnings record unless Social Security taxes are withheld from the earnings. Or, in the case of self-employment (SE), if SE taxes are paid.

Determining whether or not something is wages or self-employment income and whether or not it is subject to Social Security taxes is actually under the IRS’s jurisdiction. The IRS is responsible for collecting taxes, not the Social Security Administration (SSA). The SSA simply posts wages and self-employment earnings that are reported as such to the IRS, and if the appropriate SS or SE taxes are paid. SSA can make a recommendation to the IRS if they find evidence of misreporting of wages or self-employment, but it’s ultimately the IRS’s call regarding what income gets posted to a person’s SS earnings history (https://secure.ssa.gov/apps10/poms.nsf/lnx/0301401020).

It sounds like you were apparently awarded some type damages for the loss of wages that you presumably would have earned if you would have been able to continue working. In most cases, such damages would not be classified as earnings for Social Security coverage purposes (https://secure.ssa.gov/apps10/poms.nsf/lnx/0301402410). First of all, for income to be classified as wages there must be an employer/employee relationship. In other words, if the income comes from some entity (e.g. an insurance company) other than the person’s employer, it couldn’t be considered as wages for coverage purposes. Furthermore, even if the damages are paid by the employee’s current or former employer, it could only count as wages for coverage purposes if it’s considered as payment for services rendered as an employee.

Some payments for non-work periods do count as covered wages (i.e. sick and vacation pay), but that’s generally true when the payments are part of a contract between the employee and employer. As such, they are considered as part of the employee’s compensation package. Damages awarded as part of a lawsuit for a period of non-work would not be a part of the employee’s compensation package, so I don’t believe it could be classified as covered earnings.

However, my area of expertise is limited to Social Security benefits, not IRS regulations. The bottom line, in my opinion, is that if Social Security taxes were withheld from your award then that income should be posted to your Social Security earnings record. Otherwise, it’s not going to be posted. And, if SS taxes weren’t withheld but should have been withheld, then the IRS would need to go after the employer to recover the unpaid taxes.

Best, Jerry