if i settled a discrimination lawsuit and a portion was done as wages and balance was considered the pain and suffering would I be rightfully listed as 'self employed contractor' and required to pay all taxes even the employer portion ?

I had a settlement paid out to me and had two different checks one of which the employer did pay check as if back pay and the second portion was considered I believe the pain and suffering (can't remember the term) but I found myself paying the employers tax because they claimed me to be a self employed contractor which I was not at all. Is this legal .... It was a settlement for a discrimination lawsuit for illegal discharge.

2 answers  |  asked Mar 12, 2015 5:29 PM [EST]  |  applies to Ohio

Answers (2)

Neil Klingshirn
I agree with Chris. It sounds like the employer checked “Box 7,” which is non-employee compensation, but should have checked Box 3. Box 7 subjects the payment to self employment taxes. Box 3 subjects it only to ordinary income taxation.

Here is an excerpt from the IRS Guidance on reporting damages awards and settlements:

Reporting of Damage Awards on Forms 1099-MISC

IRC §§ 6041 and 6051 and Treasury Regulations 1.6041-1(f) and
1.6041-2 are the operative provisions with respect to the reporting
requirements for the client receiving the settlement or award.

Box 3 of Form 1099-MISC is used to report other income that is not
reportable in one of the other boxes on the form. Generally, all
punitive damages (even if they relate to physical injury or physical
sickness), any damages for non-physical injuries or sickness,
liquidated damages received under the Age Discrimination in
Employment Act of 1967, and any other taxable damages are required to
be reported in Box 3. Generally, all compensatory damages for
non-physical injuries or sickness (for example, emotional distress)
arising from employment discrimination or defamation are reportable
in Box 3. However, if a taxpayer receives an award of back pay that
constitutes wages, it generally would be reportable on Form W-2, not
Form 1099-MISC.

Bottom line, the employer appears to have made a mistake by checking Box 7 instead of Box 3.

The employer can fix this by re-issuing a 1099 with box 3, and not 7, checked. If the employer refuses to do so, get your attorney involved, as it could constitute a breach of the settlement agreement.

posted by Neil Klingshirn  |  Mar 13, 2015 07:03 AM [EST]
Christina Royer
This question is really best answered by an accountant, who can look at your entire tax situation and advise you accordingly.

Generally speaking, though, the portion of an employment discrimination settlement that is allocated to compensatory damages (emotional distress, that sort of thing) should be reported on Form 1099-MISC, in box, which is for "other income." It sounds like this part of your settlement was reported in box 7 of Form 1099-MISC, which is for wages paid to an independent contractor.

Emotional distress damages are generally taxable as income, but they are not generally subject to employment taxes, like contractor wages are.

If you consult with an accountant, he or she can advise you on whether it is possible to rectify this situation and, if so, how.

I hope that helps,

posted by Christina Royer  |  Mar 12, 2015 5:42 PM [EST]

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