• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Received w2 as a part of lawsuit settlement and same amount as 1099-misc

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

curiousv

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

I am asking for an elderly lady ...
She got a employment lawsuit settlement..employment was back in 2014 in State of IL because she was underpaid and lawsuit was settled in 2017 so received w2 for $10750 and same amount on 1099-misc (non employee compensation checked) ... total $21500

1099-misc was not only for penalties but was also for liquidated damages...(its not specified how much for each)...so I understand penalties are taxable income but what about liquidated damages? by the way it was govt. provided attorney so she did not pay any fees but lawyer said he could have charged $4k for this lawsuit.

Because of this unanticipated income she needs to refund $300 she received as premium credit under obamacare... reason...she earned more income than you estimated when you enrolled in your plan (she did know when the lawsuit will settle)

not only that...employer did not withdraw any federal income tax (employer did withdraw $240 for IL state income tax) so now she owes 1300$ ..

Is there any way to avoid reporting this income in 2017 ...and report it in 2014 when real employment was there? if not ..is there any way she can save on that 300$ obamacare premium tax credit refund?
 


LdiJ

Senior Member
What is the name of your state (only U.S. law)? WA state

I am asking for an elderly lady ...
She got a employment lawsuit settlement..employment was back in 2014 in State of IL because she was underpaid and lawsuit was settled in 2017 so received w2 for $10750 and same amount on 1099-misc (non employee compensation checked) ... total $21500

1099-misc was not only for penalties but was also for liquidated damages...(its not specified how much for each)...so I understand penalties are taxable income but what about liquidated damages? by the way it was govt. provided attorney so she did not pay any fees but lawyer said he could have charged $4k for this lawsuit.

Because of this unanticipated income she needs to refund $300 she received as premium credit under obamacare... reason...she earned more income than you estimated when you enrolled in your plan (she did know when the lawsuit will settle)

not only that...employer did not withdraw any federal income tax (employer did withdraw $240 for IL state income tax) so now she owes 1300$ ..

Is there any way to avoid reporting this income in 2017 ...and report it in 2014 when real employment was there? if not ..is there any way she can save on that 300$ obamacare premium tax credit refund?
I am truly sorry, but unless she has any damages that the 1099 money was to cover, that would allow her to not claim all of it as income (medical costs, attorney costs, or any other legitimate damages) then the 1099 money is considered to be income.

No, the money cannot be treated as 2014 income.
 

Taxing Matters

Overtaxed Member
What is the name of your state (only U.S. law)? WA state

I am asking for an elderly lady ...
She got a employment lawsuit settlement..employment was back in 2014 in State of IL because she was underpaid and lawsuit was settled in 2017 so received w2 for $10750 and same amount on 1099-misc (non employee compensation checked) ... total $21500

Is there any way to avoid reporting this income in 2017 ...and report it in 2014 when real employment was there? if not ..is there any way she can save on that 300$ obamacare premium tax credit refund?
The lawsuit was apparently to recover money owed to her by her employer, which means that had she been paid properly to begin with that money would have been taxable income in the year it was actually paid. The lawsuit does not change that. The amount she received as a result of the lawsuit is still taxable income in the year she was actually paid. If she got the check in 2017 then it is income for 2017. She does not have the option to report that as income for 2014 instead.
 

LdiJ

Senior Member
Total $21500 ... $10750 on W2 and $10750 on 1099-MISC (non employee compensation)
Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income. I believe that it should have been reported on Line 3 (other income). I believe that the employer has either made a mistake putting it on line 7, or did so deliberately, out of spite. If I were the taxpayer I would report it on line 21 as other income, rather than on Schedule C as self employment income. However, I would be sure to safely keep a copy of all documentation related to the settlement, in order to demonstrate to the IRS when (not if) they get a CP-2000 letter challenging it, that it was not self employment income.
 

curiousv

Member
Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income. I believe that it should have been reported on Line 3 (other income). I believe that the employer has either made a mistake putting it on line 7, or did so deliberately, out of spite. If I were the taxpayer I would report it on line 21 as other income, rather than on Schedule C as self employment income. However, I would be sure to safely keep a copy of all documentation related to the settlement, in order to demonstrate to the IRS when (not if) they get a CP-2000 letter challenging it, that it was not self employment income.

Yes that is a good advice.
And I did think it myself but than I thought she could be in trouble because 1099-MISC specifically says 'non employee compensation and when we use free sites like hnr block or turbotax ...it does not give you option to change or ask any questions...

It sounds like you are saying that for sure she will get cp-2000 correct? that is what we should be afraid of?
or just showing settlement agreement will be enough and this happens all the time?

Btw ..I went to turbotax and removed 1099-misc income and put it on other income and surprisingly there is no difference in tax ...its exact same amount 1300$ to federal IRS and 558$ to IL IRS
 
Last edited:

LdiJ

Senior Member
Yes that is a good advice.
And I did think it myself but than I thought she could be in trouble because 1099-MISC specifically says 'non employee compensation and when we use free sites like hnr block or turbotax ...it does not give you option to change or ask any questions...

It sounds like you are saying that for sure she will get cp-2000 correct? that is what we should be afraid of?
or just showing settlement agreement will be enough and this happens all the time?
I should clarify. A CP-2000 letters is what I call a mismatch letter. The IRS runs a program where they match up documents that they have received from outside sources (W2s, 1099's of all kinds etc.) with tax returns that they have received, by SSN. If they get a mismatch, then a letter gets issued to the taxpayer proposing to increase tax due to the discrepancy. The taxpayer has an opportunity to prove the IRS wrong.

Now, the IRS does not issue letters for every discrepancy, some they consider too minor to bother with... That kind of discrepancy however, is one that I see happen all of the time, therefore that is one where I believe its almost guaranteed that she would get the letter. Its nothing to actually be afraid of in this instance, as it will just be her opportunity to explain to the IRS that the income was NOT non employee compensation.
 

curiousv

Member
Thanks again but if you did not notice...even after changing 1099-misc to line 21 ...tax liability remains same...

any comments?
 

Taxing Matters

Overtaxed Member
Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income. I believe that it should have been reported on Line 3 (other income). I believe that the employer has either made a mistake putting it on line 7, or did so deliberately, out of spite. If I were the taxpayer I would report it on line 21 as other income, rather than on Schedule C as self employment income. However, I would be sure to safely keep a copy of all documentation related to the settlement, in order to demonstrate to the IRS when (not if) they get a CP-2000 letter challenging it, that it was not self employment income.
Why are you assuming that the employer treated it as self-employment income? The fact that it was reported on a 1099-MISC does not automatically compel the conclusion that the employer treated it as self-employment income. That form is used for all kinds of non-employee comp income. All the that the OP telling us it was reported on a Form 1099-MISC tells us that it was not part of the wage income. The details of the award or settlement are needed to determine the correct tax treatment of what was received; the forms issued by the employer are not controlling, as your answer correctly implies.
 

Taxing Matters

Overtaxed Member
Thanks again but if you did not notice...even after changing 1099-misc to line 21 ...tax liability remains same...

any comments?
It wouldn't make a difference in income tax if all the income is ordinary income unless the income was self-employment income, in which case the income tax would be a bit lower but the taxpayer would also owe self-employment tax. But as the 1099 income was not likely self-employment income (and I’m guessing the employer as such either) it wouldn't make any difference in income tax whether it was called wages, punitive damages, or compensation for some non-physical injury or loss.
 

Zigner

Senior Member, Non-Attorney
Why are you assuming that the employer treated it as self-employment income? The fact that it was reported on a 1099-MISC does not automatically compel the conclusion that the employer treated it as self-employment income. That form is used for all kinds of non-employee comp income. All the that the OP telling us it was reported on a Form 1099-MISC tells us that it was not part of the wage income. The details of the award or settlement are needed to determine the correct tax treatment of what was received; the forms issued by the employer are not controlling, as your answer correctly implies.
She is just saying that line 3 might be a better choice.
 

Taxing Matters

Overtaxed Member
She is just saying that line 3 might be a better choice.
What she said was “Well, I have a serious problem with it being reported on Line 7 (non employee compensation) because it is NOT self employment income. ” The part I bolded is what I was asking about — she seems to be equating the Form 1099-MISC with self-employment income or at least assuming that is how the employer regarded it, and my point is that the form is not used for only self-employment income and thus no reason to assume that it meant the employer was trying to screw the OP by treating it as self-employment income.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top