The IRS has posted answers to some frequently asked questions about taxes relating to the Gulf of Mexico oil spill.
Key point: Any payments received for lost business income or profits are subject to tax because the funds are replacing income that would otherwise be taxable. Similarly, if you’re self-employed, you will also owe self-employment tax on business income replacements.
However, generally, no income tax withholding or FICA is due on replacement wages unless the employer or its agent makes the payments.
For more information on this topic, read the complete IRS posting at www.irs.gov/newsroom/article/0,,id=224886,00.html, or call the special IRS hot line set up for oil spill questions at (866) 562-5227.