Job Discrimination Settlement Tax- 1099-MISC

[feddey26]

What is the name of your state (only U.S. law)? MN

Not sure if anyone can answer these questions here or if I need to speak with a tax specialist, but it is worth trying.

Who fills out the 1099 Misc tax form for a Job Discrimination Settlement? Is the form sent with the payment or separately from where the payment is coming from or would I fill out the 1099-Misc when I file taxes? Can you stipulate which box you want the amount to go in (box 3 as "other" or box 7 as "non employee compensation) or does the former employer making the payment decide that? Does the tax table differ depending on which box the amount is entered in?

 

[FlyingRon]

The person who pays the money fills out the 1099.
Frankly, in the long run it matters NOT what the 1099 says and what the actual nature of the payment is.
Was this mandated by a court action or arbitration of some sort?
Most such payments, as they are compensation for wages that should have been paid, are taxable.

 

[LdiJ]

What is the name of your state (only U.S. law)? MN

Not sure if anyone can answer these questions here or if I need to speak with a tax specialist, but it is worth trying.

Who fills out the 1099 Misc tax form for a Job Discrimination Settlement? Is the form sent with the payment or separately from where the payment is coming from or would I fill out the 1099-Misc when I file taxes? Can you stipulate which box you want the amount to go in (box 3 as "other" or box 7 as "non employee compensation) or does the former employer making the payment decide that? Does the tax table differ depending on which box the amount is entered in?

The payor issues the 1099. However, its possible in this instance that a 1099 should either not be issued at all, or that both a W2 and a 1099 should be issued.

Any money that replaces lost wages should be handled on a W2 with the taxes, handled accordingly. The remainder of any settlement should be issued on a 1099, again, with the appropriate boxes used.

 

[feddey26]

Part of the payment is for lost wages and insurance, 401k, and some is for punative damages. I do understand that the entire settlement is all taxable. I was just wondering how much to expect of it to go for taxes?

Thanks for you help!

 

[tranquility]

It depends on your whole return. The wages portion should have proper withholdings and the insurance portion might too (depending on the facts). The 401K can probably be deferred if entered properly in such an account and the punitive damages will be at your marginal rate.

 

[LdiJ]

It depends on your whole return. The wages portion should have proper withholdings and the insurance portion might too (depending on the facts). The 401K can probably be deferred if entered properly in such an account and the punitive damages will be at your marginal rate.

I agree with Tranq...however due to some wild things that I have seen with these kinds of settlements, I usually advise people to plan for about 40-45% (combined federal and state) in taxes just to be safe. That way you don't end up spending most of it and then having not enough left to cover the taxes.

 

[feddey26]

I agree with Tranq...however due to some wild things that I have seen with these kinds of settlements, I usually advise people to plan for about 40-45% (combined federal and state) in taxes just to be safe. That way you don't end up spending most of it and then having not enough left to cover the taxes.

That's what I was afraid of. Thanks for that advice. Does it make a difference if the settlement that is not part of back wages, goes in Box 3 as "Other" or Box 7 as "Non-employee Compensation" on the 1099?

 

[LdiJ]

That's what I was afraid of. Thanks for that advice. Does it make a difference if the settlement that is not part of back wages, goes in Box 3 as "Other" or Box 7 as "Non-employee Compensation" on the 1099?

Yes, there is a big difference between box 3 and box 7.

 

[Zigner]

Yes, there is a big difference between box 3 and box 7.

4 ?

 

[tranquility]

Don't go by the box checked, go by what it is for and explain any differences. What was the amount there for?

 

[davew128]

The general rule of thumb here is that the 1099/W-2 reporting will most likely be wrong.

 

[tranquility]

The general rule of thumb here is that the 1099/W-2 reporting will most likely be wrong.

On this, I concur.

 

[LdiJ]

On this, I concur.

I agree as well...therefore the onus will be on the documentation and duking it out with the IRS. Which unfortunately is usually not a simple matter.

Example: The payer issues a 1099 and puts the settlement amount in box 7 when clearly the settlement was for wages and a W2 should have been issued, the employer should have paid their share of social security and medicare taxes, and should have withheld regular taxes.

Example: The payer issues all of the money to the attorney, the attorney takes their cut, and then issues the same kind of 1099, with the payment in box 7, for the remainder.

Example: The payer issues all of the money on one 1099 and puts some of it as box 7 (when a W2 should have been issued) and some of it in box 3.

In more than 25 years as a tax professional I think that I have seen no more than two payers do it right.

The worst one I have ever seen?..goes back to 2008 and we are still fighting the IRS for a couple of clients.

Big company...many plaintiffs...several of them were our clients. The first one who came to us brought us the settlement agreement which wasn't very specific, but clearly stated that none of the settlement represented taxable income. Therefore we handled it accordingly and attached a copy of the settlement agreement...apparently no 1099 issued. We spoke to the attorney for the defendent who insisted that the settlement was not taxable.

About 30 days later another client came in with the same settlement, only this time it included a 1099-M, all in box 7, plus a cover letter that clearly indicated, that the entire settlement was taxable one way or another, based on the breakdown of the settlement included in the cover letter. We are still fighting the IRS to get the final client treated the same as the others.

 

[feddey26]

I agree as well...therefore the onus will be on the documentation and duking it out with the IRS. Which unfortunately is usually not a simple matter.

Example: The payer issues a 1099 and puts the settlement amount in box 7 when clearly the settlement was for wages and a W2 should have been issued, the employer should have paid their share of social security and medicare taxes, and should have withheld regular taxes.

Example: The payer issues all of the money to the attorney, the attorney takes their cut, and then issues the same kind of 1099, with the payment in box 7, for the remainder.

Example: The payer issues all of the money on one 1099 and puts some of it as box 7 (when a W2 should have been issued) and some of it in box 3.

In more than 25 years as a tax professional I think that I have seen no more than two payers do it right.

.

So what do you consider the right way? Is there a way to avoid the difficulties with IRS prior to the issuance of the 1099? I just want to know how I can keep most of my settlement... if there are steps I can do prior to that 1099 being filled out so I can avoid difficulties or is it out of my hands until the form comes?

 

[feddey26]

I agree as well...therefore the onus will be on the documentation and duking it out with the IRS. Which unfortunately is usually not a simple matter.


The worst one I have ever seen?..goes back to 2008 and we are still fighting the IRS for a couple of clients.

Big company...many plaintiffs...several of them were our clients. The first one who came to us brought us the settlement agreement which wasn't very specific, but clearly stated that none of the settlement represented taxable income. Therefore we handled it accordingly and attached a copy of the settlement agreement...apparently no 1099 issued. We spoke to the attorney for the defendent who insisted that the settlement was not taxable.

About 30 days later another client came in with the same settlement, only this time it included a 1099-M, all in box 7, plus a cover letter that clearly indicated, that the entire settlement was taxable one way or another, based on the breakdown of the settlement included in the cover letter. We are still fighting the IRS to get the final client treated the same as the others.

That is bad and not right at all. Could the IRS come back and say the others need to pay as the final client did? Hopefully that would never happen.