Taxes on Wrongful Termination Settlement
The first step in collecting a wrongful termination settlement is to figure out how much money you'll owe in taxes. There are a number of tax-related issues to consider, including the plaintiffs and business structure. Here are some guidelines to keep in mind. Also, you should consult a tax accountant or attorney to ensure you stay on the right side of the law. It is always a good idea to set aside a portion of the settlement to pay for your April tax bill, as you may suddenly find yourself in a higher tax bracket than you thought.
In general, taxing a settlement depends on how much damages the employee would have been entitled to had the employer denied the termination. In the plaintiff sought a settlement that included different damages. The IRS considers this fact when determining how much of the settlement is taxable. Generally, the IRS gives deference to settlement agreements, especially if the settlement was negotiated in good faith and at arm's length.
Generally, the settlement payment should be reported as a wage or as income. If the plaintiff receives prejudgment interest, that portion should be reported on a Form 1099-MISC. It is important for all parties to report the settlement proceeds in a consistent manner. If the settlement payment involves multiple checks, it is wise to write separate checks for the plaintiff and deduct the attorney's fees. The settlement agreement should clearly specify the tax reporting requirements and the form that will be used.
The IRS does not usually tax the entire lump-sum award, though the IRS does not always override the intent of the parties. Therefore, the IRS will generally look at the payor's intent when characterizing payments and determining the reporting requirements for Form 1099. Therefore, it is important to carefully review the terms of any settlement before signing any agreement. You may want to contact a tax lawyer to make sure the agreement is compliant.
In addition to compensatory damages, you can claim punitive damages. Punitive damages are not deductible, but they are usually taxable. Other wrongful termination compensation may include back pay, interest on money owed, and emotional distress. Attorney fees are also deductible, but in some instances, they are not. The attorney fees will be taxable only if they are in excess of the settlement amount. This is a common scenario in many cases.
If you've been awarded a wrongful termination settlement, you may wonder whether or not to pay any taxes on it. A successful plaintiff may want to set aside some of the money to pay the IRS. Taxing a disability discrimination award is taxable, but if you have another wrongful termination claim, you should consider whether it's worth the risk. If the tax court rules in your favor, it's best to pay your tax bill accordingly.
Another thing to keep in mind is that lawsuit settlements are subject to different tax treatment. If you've been fired from your job, you may have to pay taxes on this money as well. In addition to paying taxes on the wrongful termination settlement, you'll have to pay settlement interest. Interest is accrued on unpaid settlement amounts between the time you were injured and the time of the judgment. This is taxable, but you may be able to reduce the amount of taxable income with a tax-deductible lump sum.