Question 1

What's the difference between past lost wages and future lost earning capacity?

Accepted Answer

Past lost wages: the dollar amount you actually didn't earn between the injury date and the calculation date (or settlement date). Math is straightforward — wage rate × time off work, plus prorated benefits, bonuses, commissions, and overtime that would otherwise have accrued. No discounting needed because the loss already happened. Future lost earning capacity (or 'future lost wages'): the projected reduction in future earnings going forward, typically arising from permanent partial or total disability. This requires three additional inputs: work-life expectancy (how many more years you would have worked but for the injury), wage growth assumption (real wage growth, typically 1–2.5% above CPI), and a discount rate (to convert future dollars to present value). The future-earnings figure is much larger than past wages on most permanent-disability claims.

Question 2

Why does future earning capacity get discounted to present value?

Accepted Answer

A dollar received today is worth more than a dollar received in 20 years, because today's dollar can be invested at a positive interest rate and grow. So a $50,000/year earnings loss for 20 years is NOT a $1,000,000 lost-earnings claim — it's the present value of that 20-year stream, discounted at an appropriate rate. Using a 4% AFR discount rate, $50K/year for 20 years has a present value of approximately $680,000, not $1,000,000. The discount is required by every federal court and most state courts; settlement demands that don't discount are routinely challenged by defense economists and reduced by judges. The discount-rate input is the single largest variable in future-earnings claims — a 1% change in the discount rate can shift the present value by 10–15% on a 20-year stream.

Question 3

What is a 'work-life expectancy' and how does the BLS calculate it?

Accepted Answer

Work-life expectancy (WLE) is the statistical estimate of how many more years a person of a given age, sex, education, and employment status will participate in the labor force. The Bureau of Labor Statistics (BLS) publishes Work-Life Tables (most recent comprehensive update: 'Worklife Estimates: Effects of Race and Education,' published periodically with updated cohort data) that provide WLE values for 5-year age brackets. A 35-year-old college-educated employed male has a WLE of roughly 28 additional years; a 50-year-old high-school-only female has roughly 12. WLE is shorter than 'years to retirement age' because it accounts for the probability of voluntary or involuntary labor force exit (layoffs, caregiving, disability, etc.) — using 'years to age 65' as a substitute is the most common defense-economist objection to plaintiff lost-earnings claims.

Question 4

What discount rate should I use?

Accepted Answer

Three primary choices, each with defensible legal support: (1) IRS Applicable Federal Rate (AFR) — published monthly by the IRS, currently ~4–5% short-term, ~4% mid-term, ~4.5% long-term as of 2026. Conservative, well-documented, broadly accepted. (2) U.S. Treasury yield curve at injury date — used in some federal jurisdictions; matches the duration of the future earnings stream to the matching Treasury maturity. More accurate but more variable. (3) Risk-free rate as measured by a forensic economist with a specific methodology citation — used in larger claims with expert testimony. For estimator purposes (not litigation), AFR mid-term is a defensible default. Some plaintiff economists use a real (inflation-adjusted) discount rate of 1–2.5% applied to real-dollar earnings; some defense economists use a nominal discount rate of 4–6% applied to nominal-dollar earnings projections. Either methodology works if applied consistently to both wages and discount.

Question 5

Are personal injury settlements taxable?

Accepted Answer

Per IRC §104(a)(2), compensation for personal physical injuries or physical sickness is EXCLUDED from gross income — including the lost-wages component if it stems from a physical injury claim. So a $500K settlement allocated $200K to lost wages + $300K to pain and suffering is generally tax-free if the underlying injury is physical. Important exceptions: (a) punitive damages are taxable; (b) interest accrued on the settlement is taxable; (c) emotional-distress-only claims without physical injury are taxable; (d) employment discrimination settlements (Title VII, ADEA) are taxable; (e) settlements that allocate a portion to back wages may be subject to FICA withholding even if the §104 exclusion applies. State tax treatment varies; some states follow federal §104 exclusion, some have variations. Verify with a CPA or tax attorney before signing a settlement agreement.

Question 6

How are benefits, bonuses, and overtime treated?

Accepted Answer

Past lost wages should include the value of all employer-provided benefits that would have accrued during the disability period: employer-paid health insurance premiums, employer 401(k) match, employer-paid life insurance, vested pension contributions, paid time off, and bonuses or commissions that were reasonably expected based on prior-year data. Future lost earning capacity should include the present value of those same benefit streams projected forward. The exclusion of benefits is a common error in plaintiff demands and a typical source of defense-side reduction arguments. Benefits often add 25–40% to the wage base — a $80K salaried plaintiff with full employer benefits has a true compensation rate of ~$100–112K for lost-earnings purposes.

Question 7

What if the plaintiff is self-employed or has irregular income?

Accepted Answer

Self-employed plaintiffs (Schedule C, partnership distributions, S-Corp shareholders) require additional methodological care: (a) base lost-earnings on a 3–5 year trailing average of net earnings, not gross revenue or peak earnings; (b) deduct only direct labor-related earnings, not pass-through investment income or rental income; (c) account for business overhead that continues during disability (rent, insurance, subscription tools) which reduces the net loss; (d) consider whether the business could continue with hired labor in the plaintiff's role. Irregular-income plaintiffs (commissions, sales, consulting) typically require a forensic economist to model the earnings stream with appropriate volatility assumptions. This calculator assumes salaried or hourly W-2 employment as the base case; for self-employed/irregular income, treat outputs as a rough approximation only.

Question 8

Does this calculator account for taxes on past lost wages?

Accepted Answer

No — by design. Most state jurisdictions follow the 'gross-up rule': lost-wages awards are calculated on a gross (pre-tax) basis, because the resulting recovery is generally tax-free under IRC §104(a)(2). Awarding net-of-tax wages would under-compensate the plaintiff. A minority of state jurisdictions (notably some federal cases under specific statutes) require net-of-tax calculations. The default federal rule and most state rules use gross. If your jurisdiction is one of the exceptions, an attorney + economist will adjust the methodology — this estimator uses gross by default.

Lost Wages Calculator

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