Under this method, you refigure the taxable part of all your benefits (including the lump-sum payment) for the earlier year using that year's income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment.

Do you pay tax on back pay?

The total gross amount of a back payment, other than a lump sum in arrears, should be included in Gross payments on the payee's payment summary. The withheld amount from the payment is included in the Total tax withheld box.

How does backpay get taxed?

The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. However, for income tax purposes, the IRS treats all back pay as wages in the year paid.