Is a wrongful termination settlement taxable? The answer depends on many factors, including the structure of the business, the plaintiffs' claims, and other related issues. Here are some things to consider. You can find the answer to these questions by referencing the IRS publication 1098. You may even be surprised by how little you'll be required to pay in taxes. After all, who wants to pay unexpected bills? But if you've filed a wrongful termination lawsuit, this article will help you determine whether the settlement you receive is tax-deductible.
If you're the recipient of a wrongful termination settlement, you may need to file a tax return. The IRS has strict regulations on wage-based claims, including the allocation of attorney fees. Your former employer must issue Form 1099-MISC to report these fees to the IRS. Otherwise, the entire settlement amount will be considered wage income and subject to employment taxes and withholding. In general, you should file Form 1099-MISC as soon as you receive your settlement.
In general, a wrongful termination settlement is taxable, except if the money covers medical expenses or lost wages. Typically, a portion of a wrongful termination settlement is paid on a W-2 basis. The employer will deduct taxes at the same rate as they did when you were working. A 1099 form, however, is tax-deductible. This means that the government will take a cut of your settlement when it comes time to file taxes.
While the U.S. Tax Code defines income broadly, Section 61(a) provides some specific exclusions. While damages received as a result of a wrongful termination employment lawsuit do not fall into the exclusions, personal injury awards do. This is because the tax code does not define compensation as an "intangible asset."
While a wrongful termination settlement will likely be taxed at the end of the trial, the claimant will be entitled to a deduction for his or her attorneys' fees. While attorneys' fees are generally deductible above-the-line in employment-related claims, it is important to remember that they may also be deductible as an itemized deduction on Schedule A. However, these expenses cannot exceed 2 percent of your adjusted gross income and are not deductible for Alternative Minimum Tax purposes.
Although few wrongful termination lawsuits make it to trial, filing a lawsuit puts you in a better position to negotiate with your employer and maximize your compensation. A lawsuit also kicks off a formal discovery process, which involves depositions and requests for documents. If you filed a lawsuit for wrongful termination, the average settlement received by readers was nearly $12,000 more than those who didn't. So, it's important to contact a wrongful termination lawyer for more information.
Generally, a wrongful termination settlement isn't tax deductible, unless it includes a portion of the plaintiff's medical expenses before the lawsuit was filed. While you must include a portion of your prior medical expenses in a wrongful termination settlement, it is important to remember that it is meant to make you whole. If your emotional distress was caused by the wrongful actions of your former employer, emotional distress damages are not included in income.