Prisoners are required to file a federal income tax return according to the same criteria as those not in prison. If in doubt as to whether a particular incarcerated individual needs to file, refer to IRS Publication 501.
A prisoner may receive compensation based on services performed either in a "correctional industry" (such as license plate manufacturing) or on "work release" assignments, and they should be issued a Form W-2 or Form 1099-NEC as appropriate. If their employer doesn't issue them a W-2, their income should be reported on a substitute W-2.
One important difference between prisoners and non-prisoners is that employee income received for work performed while an inmate in a penal institution, in a work release program, or in a halfway house must be deducted from earned income for the purpose of calculating the Earned Income Credit.
After entering a prisoner's income into the tax return, you must indicate how much of their earned income relates to their work as a prisoner. To indicate the prisoner's earned income in TaxSlayer Pro, from the Federal Section of the tax return (Form 1040) select:
- Less Common Income
- Other Compensation
- Prisoner Earned Income - enter the total income earned as a prisoner on Form(s) W-2 to be excluded from the Earned Income Credit calculation.
After doing the above, the indicator "PRI" along with the excluded amount will print on Form 1040 Line 1.
Note: This is an article on entering prisoner income in the TaxSlayer Pro program. This is not intended as tax advice.
IRS Publication 4924 (includes a helpful FAQ)