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It depends where on 1099Misc the income will be reported. If reported as other income in box 3 and the settlement is related to physical or mental injury you will be able to deduct it. But if it is treated as back pay (lost wages and such) and is reported in box 7 as nonemployee compensation than you have a problem. IRS takes third part reporting very seriously and you will have to convince IRS that the employer is wrong and convince employer to re-issue you new tax form.
Income on 1099Misc can be reported in few ways. The employer will choose the box in which he will report the income. The form will not determine the nature of the pay. Usually taxable settlements are reported in box 3, backpay or other nonemployee compensation in box 7. A nontaxable part of a settlement is usually not reported at all.
You will find out when the employer issue you the tax form next year. If the settlement is reported as taxable you will need to prove the mental mental distress was direct result of physical injury. Keep all your doctor's and hospital bills in case IRS ask for it.