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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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I am trying to reach a settlement with a previous employer

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I am trying to reach a settlement with a previous employer after getting a summary judgement in my favor. the amount of the settlement is $49000.00. The employer wants to report $24500.00 as wages and take the appropiate taxes on it. The other half would be given to me ans reported on a 1099 as income. What is the difference when it comes to taxes? The employer also wants me to release them from any taxes that might be due. I don't want to make any mistakes and sign any document that my work against me. Please help
Submitted: 6 years ago.
Category: Tax
Expert:  Wallstreet Esq. replied 6 years ago.

Hello I am a licensed attorney here to help you with your question, please review my response and do not hesitate to ask for clarification.


In terms of the 1099 income you will have to declare the total amount as income, you do not pay any payroll taxes on it it would be considered as self employment income and since you do not have your own business, it will be incuded in your personal 1040 and your federal taxes would be paid at a higher rate.


The employer releasing themselves of tax liability could be a benefit for them and you as the 1099 income you will receive in a lump sum and even if you have to pay extra federal and state taxes on it, you would receive more since other withholding taxes are not comming out of the check.


If these were unpaid back wages, they should pay all the applicable taxes as now the burden shifts to you at the end of the year.

Customer: replied 6 years ago.
I forgot to mention that my employer said half is back wages and the other half will be for damages. When I called the IRS they said that I need to make sure my employer checks box 3 not box 7 of the 1099 form. What is the difference?. Should I also release my employer from any taxes that might be due, or should I insist on a clause that says that if there should be any taxes due from the employer they should pay that portion, and any taxes that are my responsibility I should pay for those?
Expert:  Wallstreet Esq. replied 6 years ago.

box 7 is only valid for nonemployees. Box 7 is the most common box to be filled out on a 1099-MISC. It is intended for independent contractors. If you are truly an employee - and not a contractor - and were paid with a 1099-MISC, you should complain to the employer and the IRS.


Box 3 is for "Other income." This box includes payments to you of prizes, awards or punitive damages. So this should be checked.


The clause included is fine, you should have the attorney who settled the case make sure the punitive damages they are paying is valid.

Customer: replied 6 years ago.
My initial award on the summary judgement was for $87,600.oo which represented 1 year salary of $43,800.00 in back salary and the same amount as punitive damages plus 12% interest. The judgement also awarded separate attorney's fees to be paid directly to the attorney. Rather that go thru a lenghty appeal proccess in which the judgement would be partially reversed, I have decided to settle. My attorney reccomended to consult a tax attorney or an accountant, since that is not his area of expertise. Do you believe that dividing the settlement amount, half for back salary and half for damages, would satisfy the IRS?
Expert:  Wallstreet Esq. replied 6 years ago.
The punitive award should not be considered wages, the original settlement term is correct if the settlement was split in half. You will have to pay taxes on the 1099 at the end of the year as income. The clause is fine to sign, however I would make sure the punitive damages is truly the 1099 income you recieve.
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