How Lost Income is Calculated

Under California personal injury law, plaintiffs are eligible for compensation that includes lost wages. Lost wages are income the plaintiff would have earned had they not been injured by the defendant.

Plaintiffs can also recover anticipated future losses of income, which are usually referred to as “lost earning capacity” in California.

Both lost wages and lost earning capacity can be recovered by a plaintiff for a defendant’s negligence, recklessness, gross negligence, intentional wrongful acts, or strict liability.

What are lost wages?

Lost wages in California can include:

• Regular pay (hourly or salary)
• Overtime pay
• Bonuses
• Commissions
• Self-employment income
• Vacation, personal, or sick days
• Any other lost perks or benefits (such as a car allowance or free meals)

What’s the difference between lost wages and lost earning capacity?

Lost wages usually refers to past income lost by the plaintiff as a result of a personal injury. These out-of-pocket losses are calculated up until the date of settlement or trial.

If an accident or injury forces the plaintiff out of work, California law allows the plaintiffs to sue for the income they will lose in the future. This amount is called “lost earning capacity” in California.

It is usually more difficult to prove a plaintiff’s lost earning capacity than their lost wages. Personal injury lawyers will need to obtain testimony from a medical and/or occupational expert to account for raises, bonuses, and career development.

How are lost wages calculated?

Personal injury plaintiffs will have to prove the amount of the earnings they claim to have lost. Their personal injury lawyer will conduct a straightforward calculation if the injury is for a relatively short, fixed period of time.

If, however, the plaintiff was due for a raise or paid based on performance, the testimony of a forensic accounting or occupational expert may be necessary to support the plaintiff’s claim of lost income.

Personal injury cases that go to trial may see a jury award prejudgment interest on lost wages, though it is not required to do so.

Do plaintiffs have to pay taxes on lost wages?

In theory, damages for lost wages are taxable in a California personal injury case. However, the Internal Revenue Code section 104 states that gross income for tax purposes does not include the amount of any damages (other than punitive damages) received in cases of physical sickness or personal physical injuries.

California courts have generally held this to exclude compensation for lost wages in lawsuits. The reasoning for this is that lost income would have been taxable if earned and is, therefore, taxable when recovered in a personal injury lawsuit.

In practice, however, California personal injury settlements are often awarded as a lump sum that does not distinguish between physical injuries and lost wages. This can make it difficult to determine if, or how much, taxes for wages are owed.

Plaintiffs should consult with a tax professional to determine what, if any, portion of their California personal injury settlement is taxable.

If you’ve sustained an injury that resulted in lost wages, call Oracle Law Firm today to open a personal injury case.