Is Hero Pay Taxable? What You Need to Know for Tax Reporting

Some workers received “hero pay” as extra compensation for working during challenging conditions, such as the COVID-19 pandemic. This additional income was often provided by employers or local governments to recognize essential workers’ contributions. However, many recipients may not realize that hero pay has tax implications.

Federal Treatment of Hero Pay

The IRS considers hero pay taxable income, subject to federal income tax, Social Security, and Medicare taxes. It does not qualify for exemptions or exclusions under the tax code. Whether issued as a one-time bonus or part of regular wages, it must be reported on tax returns like any other employment income.

Employers that provided hero pay were required to withhold payroll taxes. If included in a regular paycheck, federal taxes were likely deducted. If issued separately as a lump sum without standard withholdings, recipients may owe additional taxes when filing their returns. The tax rate depends on total taxable income and marginal tax bracket.

For those who received hero pay from government programs or grants, the tax treatment remains the same unless the authorizing legislation states otherwise. Some state and local governments exempted pandemic-related bonuses from state taxes, but these payments are still subject to federal taxation unless the IRS provides specific guidance to the contrary.

Reporting Requirements on 1099-MISC

Workers classified as independent contractors rather than employees typically receive hero pay reported on Form 1099-MISC. Unlike W-2 wages, which include automatic payroll tax withholdings, 1099-MISC payments do not have taxes deducted at the time of issuance. Recipients must calculate and pay any federal income tax and self-employment taxes if applicable.

For 2024 tax filings, businesses that paid $600 or more in hero pay to a non-employee must issue a 1099-MISC to both the recipient and the IRS. The total amount is usually listed in Box 3, which covers “Other Income.” While this income does not automatically trigger self-employment tax, if the IRS determines the recipient provided services in exchange for payment, additional reporting on Schedule SE may be required.

Failing to report 1099-MISC income can lead to penalties, with fines increasing based on how long the income remains unreported. Underreporting income can also result in interest charges on unpaid amounts. To avoid these issues, recipients should verify any 1099-MISC forms received against their own records and report the income accurately.

Distinguishing W-2 Form Reporting

When hero pay is classified as wages rather than miscellaneous income, it is reported on Form W-2, which employers issue to employees detailing total taxable compensation. Unlike 1099-MISC payments, W-2 earnings are subject to automatic payroll tax withholdings, including federal and state income taxes, Social Security, and Medicare. These deductions help employees meet tax obligations throughout the year.

The additional earnings from hero pay are included in Box 1 of the W-2, which reflects total taxable wages. Because this income is also subject to payroll taxes, it appears in Box 3 and Box 5 for Social Security and Medicare wages. If total earnings exceed the Social Security wage base limit—set at $168,600 for 2024—hero pay beyond this threshold will not be subject to Social Security tax but will still incur Medicare tax. High earners exceeding $200,000 in annual wages ($250,000 for married couples filing jointly) will also be subject to the 0.9% Additional Medicare Tax.

Employees who had taxes withheld on their hero pay but still received a lower refund than expected or owed additional tax may need to adjust their Form W-4. Increasing withholding allowances or opting for additional deductions can help align tax payments with total income. Those who received a lump sum payment outside of regular payroll cycles may have had a higher withholding rate applied, as supplemental wages can be subject to a flat 22% federal income tax withholding if paid separately.

State-Level Tax Considerations

State tax treatment of hero pay varies, with some jurisdictions fully taxing these payments while others provide partial or complete exemptions. Some states, such as California and New York, follow federal taxability rules, meaning hero pay is included in state taxable income. Others, like Oregon, have exempted certain pandemic-related bonuses, requiring taxpayers to check whether their specific payment qualifies for relief.

Beyond income tax treatment, state-level payroll tax implications can also affect net earnings. In states with their own unemployment insurance systems, additional wages from hero pay may impact employer tax rates, as taxable wage bases vary by jurisdiction. For example, in Washington, the 2024 taxable wage base for unemployment insurance contributions is $68,500, meaning any hero pay pushing wages beyond this threshold would not be subject to further UI tax. Similarly, states with disability insurance programs, such as California’s SDI tax, may apply deductions to supplemental income depending on how the payment was structured.

Earned Income Threshold Implications

The inclusion of hero pay in taxable income can affect eligibility for income-based tax credits and deductions. Since these payments increase total earnings, they may push some taxpayers above limits that qualify them for benefits such as the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC), reducing or eliminating eligibility.

For example, the EITC, which provides refundable tax benefits to low- and moderate-income workers, has strict income caps that vary based on filing status and number of dependents. In 2024, a single filer with one child must have earned income below $46,560 to qualify. If hero pay raises their income above this threshold, they could lose a portion or all of their EITC benefit, potentially offsetting any financial gain. Similarly, the Child Tax Credit phases out for single filers earning over $200,000 ($400,000 for joint filers), meaning an increase in taxable income could reduce the credit amount.

Beyond tax credits, higher reported earnings may also affect eligibility for income-based repayment plans on student loans, Medicaid, and other government assistance programs. Some states use federal adjusted gross income (AGI) to determine qualification for healthcare subsidies under the Affordable Care Act, meaning an increase in AGI due to hero pay could lead to higher insurance premiums or reduced subsidies. Taxpayers anticipating these impacts may need to explore tax planning strategies, such as increasing retirement contributions or utilizing flexible spending accounts, to mitigate the effects of higher taxable income.