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I am settling a long term disability ERISA lawsuit against…

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I am settling a long...
I am settling a long term disability ERISA lawsuit against my insurer and my employer. The insurer will pay 75% of the settlement and my employer will be paying 25%. I know it is all taxable income to me. However, I just learned my employer is going to 1099 me instead of issuing a W-2. It’s my understanding this will stick me with higher payroll taxes. Is it correct for the insurer to 1099 me in this circumstance? Is it correct for my employer to 1099 me in this circumstance? Thanks!
Submitted: 4 months ago.Category: Tax
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11/30/2017
Tax Professional: Tax.appeal.168, Tax Accountant replied 4 months ago
Tax.appeal.168
Tax.appeal.168, Tax Accountant
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Tax Professional: Tax.appeal.168, Tax Accountant replied 4 months ago

SEE BELOW:

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Any portion of the settlement proceeds paid to compensate for wages must be reported through Form W-2, and will essentially be treated by the employer as a payroll check. See I.R.C. § 6051. The employer will deduct applicable taxes and withholdings for Social Security and Medicare, and will remit the matching taxes to the IRS. See I.R.C. § 3402(a). Any portion of the settlement proceeds paid for non-wages are typically reported through Form 1099-MISC as “other income.” See I.R.C. § 6041. The employer will not deduct any taxes or withholding and will not remit any matching taxes on these non-wage payments.

Plaintiffs often request that employers treat the entire settlement payment as “other income” under Form 1099-MISC, to avoid the deduction of taxes and withholdings. While this practice may temporarily result in a larger settlement check for the plaintiff, it subjects both the employer and the employee to substantial potential tax liability. If portions of the settlement proceeds are misclassified as “other income” when, in fact, they are wages, the plaintiff will be responsible for all taxes, including the employer’s portion. If the employee is unable to satisfy the tax burden of settlement proceeds, the IRS will likely turn to the employer for payment. In addition, if an employer fails to deduct and withhold income tax amounts by treating the employee or former employee as a nonemployee, the employer may be subject to additional liability, penalties, and interest. See I.R.C. § 3509. Thus, employers should again insist on a settlement allocation that accurately reflects the circumstances and substance of the employment claims settled, and specifically should generally not agree to treat the entire settlement as “other income” under Form 1099-MISC.

REFERENCE SOURCE:

https://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/tax_consequences_of_settling_an_employment_claim.html

Refer to Guideline #4.

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