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I will be receiving a 60k settlement for a labor dispute complaint.

I am looking for advice...
I will be receiving a 60k settlement for a labor dispute complaint. I am looking for advice on how to best have the amount broken down and outlined in the settlement agreement.
I'm allowed to allocate some to back pay and some to a 1099 misc income for emotional distress etc.

If my income is 76K for the year plus this amount what would be the best way to break the settlement down including box 3 vs 7 on the 1099? I am a resident of VT
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Answered in 8 minutes by:
8/3/2012
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 16,236
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D :

Hello and thank you for using Just Answer,
Any back pay you received from the settlement will be taxable to you. Emotional distress:


Amounts are taxable to the extent that they exceed medical costs, not previously deducted, for treatment of emotional distress or mental anguish. A statement showing the entire settlement amount less related medical costs should be attached to the return. The net taxable amount should be reported as "Other Income" on line 21 of Form 1040. Damages you receive for emotional distress or mental anguish directly due to a physical injury or sickness are treated as received for the physical injury or sickness. Because these payments qualify as medical, do not include them in your income.
More on the emotional distress will lessen employment taxes but not income taxes.


 

Robin D :

Here is a link to the IRS page on this subject
http://www.irs.gov/pub/irs-pdf/p4345.pdf

Robin D :

The amount on 7 will be subject to SE (Social Security and Medicare) because normaly this would be from wages (they regularly issue a W2 for this amount not 1099MISC) and the 3 box will just be added on line 21, added to all income, and have regular tax applied.

Customer:

This is not related to a physical illness but a labor dispute for discrimination and retaliation. Should I be asking for a 1099 then or something else and which boxes should be checked so I am paying as little in taxes as possible? I had medical issues due to stress that are documented in my federal complaints but I was told they wouldn't qualify becuase that wasn't what my complaint was about - is that incorrect?

Robin D :

Yes, unfortunately.

Robin D :

Generally in a labor dispute if asny is for wages, the company issues a W2 for the wage portion. If they put it all on 1099MISC then Box 3 is best for you

Robin D :

Anything in Box 7 will be for the wages and you must pay the SE tax (like I said).

Robin D :

They normally calculate your wage portion based on the actual missed wages and then the rest would be for the distress(punitive)

Customer:

Is there a better way to ask them to report the emotional damages? or is 1099 the only option?

Robin D :

Emotional distress will be taxable but not for SE tax.

Robin D :

Like I said the wages would normally be onthe W2 (they pay have of the FICA then) better for you. The distress then in Box 3 of 1099MISC

Robin D :

have* sorry half

Robin D :

Did you have another question before you rate my assistance

Customer:

Ok, So just to summarize : to get the best tax advantage for me

Customer:

Get as much as emotional on 1099Misc with box 3 checked

Customer:

Wage portion should be w2

Robin D :

Correct

Customer:

Sounds good, thank you!

Robin D :

Thank you in advance for a positive rating

Customer:

Just to confirm. There is no other option than the 1099Misc for the emtional?

Robin D :

No, if it is not due to a physical injury it will be taxable to you.

Customer:

Ok just wanted to confirm that. Thanks

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 16,236
Experience: 15years with H & R Block. Divisional leader, Instructor
Verified
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