My wife was on Labor Code 4850 for a year in 2012. It appears only a small amount taxes were deducted by the county employer, on her W-2's. ...

Question

My wife was on Labor Code 4850 for a year in 2012. It appears only a small amount taxes were deducted by the county employer, on her W-2's. Yet we now owe over $1,000.00 in back taxes, according to the state and feds. Is this correct? We were told 4850 time was TAX FREE.

Answer

My understanding is that LC4850 is Salary Continuation. So if taxes are due on a Salary, the same would be due on Salary Continuation.

The confusion comes in because Temporary Total Disability indemnity is NOT a 'taxable event'. So you can assert to the IRS that 2/3 of the Average Wage was non-taxable Temporary Disability and the only taxable amount was the extra 1/3, and show the IRS Labor Code 4600.