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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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I am in the process of negotiating a separation and release

Customer Question

Hello,I am in the process of negotiating a separation and release agreement with my former employer. The agreement indicates that a 1099 misc. will be provided, however it does not state mental distress/damages which are nontaxable. Verbally, I was told the misc. form indicates nontaxable, however my former employer is looking at his as back pay. The agreement says they will not be responsible for any tax consequences, and that I assume liability. Should I be concerned?
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

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.

Customer: replied 1 year ago.
How do you determine what box is this done by my former employer, should it be stated in the settlement that is for mental distress/damages??? In the settlement it states that the employer denies any wrong doing/and payout is not admission of wrong doing, yet verbally they say it is for mental distress, yet mental distress is never noted and they said they were trying to avoid embarrassing me. Does the tax form that my employer issue determine injury vs back pay? I am just trying to avoid an issue with the IRS, on top of all my employment issues!
Expert:  emc011075 replied 1 year ago.

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.

Customer: replied 1 year ago.
when will I find out what box the employer will choose?
Expert:  emc011075 replied 1 year ago.

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.