Taxpayer is a city employee. Their W-2 includes a $30,000 payment the city describes as “compensation due to injury” paid in lieu of workers’ comp. The city issued a letter stating $25,000 of the $30,000 is excludable from federal taxable income, but they will not issue a corrected W-2. The letter also states: “Must send [letter] with tax return.”I’m seeing conflicting approaches:Leave the W-2 as issued and take the $25,000 exclusion as a negative adjustment on Schedule 1 (Other income/adjustments), and attach/include the letter.Or reduce W-2 wages by $25,000 in the software and prepare Form 4852 (Substitute for W-2), attaching the letter as support.For those who’ve handled this: Which method is best practice (and most defensible) when the employer refuses to correct the W-2? Is including/attaching the letter generally sufficient, and would you use Form 4852 here or only if the W-2 is truly incorrect/unavailable?

Level 5

Solved

Best way to report a city employee’s W-2 that includes a $30k injury payment where $25k is excludable per employer letter but no corrected W-2 will be issued—attach letter only, Schedule 1 adjustment, and/or file Form 4852?

Forum|Forum|5 months ago
January 29, 2026
2 replies
14 views

Taxpayer is a city employee. Their W-2 includes a $30,000 payment the city describes as “compensation due to injury” paid in lieu of workers’ comp. The city issued a letter stating $25,000 of the $30,000 is excludable from federal taxable income, but they will not issue a corrected W-2. The letter also states: “Must send [letter] with tax return.”

I’m seeing conflicting approaches:

Leave the W-2 as issued and take the $25,000 exclusion as a negative adjustment on Schedule 1 (Other income/adjustments), and attach/include the letter.
Or reduce W-2 wages by $25,000 in the software and prepare Form 4852 (Substitute for W-2), attaching the letter as support.

For those who’ve handled this: Which method is best practice (and most defensible) when the employer refuses to correct the W-2? Is including/attaching the letter generally sufficient, and would you use Form 4852 here or only if the W-2 is truly incorrect/unavailable?

ProSeries Professional

Best answer by ljr

I would do it as a negative amount to other income with a description nontaxable pay in lieu of compensation. You are less likely to get a cp2000 notice that way. If you mess with the W-2 you will get caught by the matching so input the w2 info as is.

Keep the letter in your files. You could scan and attach as PDF BUT we all know it won't be looked at.

ljrAnswer

Level 9

I would do it as a negative amount to other income with a description nontaxable pay in lieu of compensation. You are less likely to get a cp2000 notice that way. If you mess with the W-2 you will get caught by the matching so input the w2 info as is.

Keep the letter in your files. You could scan and attach as PDF BUT we all know it won't be looked at.

T

TaxGuyBill

Level 15

@jeanmarc wrote:

The city issued a letter stating $25,000 of the $30,000 is excludable from federal taxable income, but they will not issue a corrected W-2. The letter also states: “Must send [letter] with tax return.”

In my opinion, by entering it on the W-2 they filing a legal form saying it is taxable. If it fell under the same rules as non-taxable Worker's Comp, it should NOT be on a W-2 and a letter isn't going to work.

As a side note, the IRS won't look at a letter that is attached to a tax return, and the IRS definitely won't rely on the letter claiming its tax-exempt status unless the letter specifically explains WHY the employer put non-taxable income on a W-2.

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