The invention relates to a wood filler earthworm biofilter and a method thereof for processing town residue sludge. The wood filler earthworm biofilter comprises a taper-shaped water distributor (2) in which porous spherical filler (2) is arranged, 3-5 stages of filter bed reactors in which wood filler (8) and eisenia foetida (6) are filled, and a settling pond from top to bottom, wherein the upper part of the settling pond is provided with a supernate return pipe (10); and the bottom of the settling pond is provided with a sludge discharging pipe (13). After the residue sludge in the secondary settling pond behind a biological reaction pond enters a sludge conditioning pond to be diluted, the residue sludge is pumped into the taper-shaped water distributor by a peristaltic pump; after being evenly distributed, the residue sludge enters the filter bed reactor; after the residue sludge is eaten and digested by the eisenia foetida (6), and is subjected to actions, such as microbial decomposition and the like to realize residue sludge reduction and stabilization processing; finally, the residue sludge is discharged into the settling pond in the eisenia foetida sludge mode; after the eisenia foetida sludge is condensed and naturally dried, the eisenia foetida sludge can be used as soil amendment; the supernate in the settling pond returns to the biological reaction pond via the return pipe (10) to be recycled in the secondary settling pond.