2015 YLD
Bridge the Gap Seminar
Taxation of Terminations,
Settlements and Judges
11:30 a.m.-12:00 p.m.
Presented by:
David Repp
Dickinson Mackaman Tyler & Hagen PC
699 Walnut St.
Suite 1600
Des Moines, IA 50309
Phone: 515-244-2600
Thursday, May 14, 2015
Taxation of Terminations,
Settlements and Judgments
by David M. Repp
4/10/2015
Unless specifically exempted, every employer making payment of wages to an employee
is required to withhold Federal income taxes and to pay such withheld taxes to the United States
Treasury. IRC § 3402(a)(1). The term “wages” is defined as all remuneration for services
performed by an employee including the value of remuneration paid in a medium other than cash
unless specifically excluded. IRC § 3401(a). A similar (but not identical) set of rules apply to
FICA withholding. IRC §§ 3101; 3121(a). This article discusses some of the more common
forms of compensation paid to a terminating employee and whether such payments are subject to
income tax and FICA withholding.
Severance Pay. The most common type of payment to a terminated employee is
severance pay, which is taxable compensation income. IRC § 61; Ramella v. Comr. 1979 TCM
177. Severance pay is taxable even if, as part of their separation agreements, departing
employees sign waivers releasing their former employers from potential future claims, including
claims of unlawful discrimination. Webb v. Comr., 1996 TCM 50; Sodoma v. Comr., 1996 TCM
275; Foster v. Comr., 1996 TCM 276. Amounts paid to a terminated employee are
compensatory and taxable as severance pay, even where the employer had no legal obligation to
make the payments. Schwartz v. Comr., 1989 TCM 97. Severance or dismissal pay is treated as
supplemental wages and fully subject to federal income tax withholding. IRC§ 3402(o); Treas.
Reg. § 31.3401(a)-1(b)(4). The IRS allows two alternative withholding methods on severance
pay: the flat rate method and the aggregate method. IRS Information Letter 2010-0042.
Optional flat rate withholding method. This method allows an employer to withhold
from the severance payment at a flat rate of 25% without regard to the employee's filing
status or allowances claimed on Form W-4. An employer may only use this method if it
has also withheld income tax from regular wages paid to the employee during the same
calendar year as the severance payment, or in the preceding calendar year if the
supplemental wages are separately stated on the employer's payroll records.
Aggregate method. Under the aggregate method, the employer adds the supplemental
and regular wages (if any) for the most recent payroll period in the current year together,
and then figures the income tax withholding as if the total were a single payment. This
calculation takes into consideration the employee's filing status and withholding
allowances. Employers may use this method in any situation where they are paying an
employee supplemental wages that do not exceed $1 million in a calendar year.
Severance pay is also subject to FICA tax withholding. U.S. Quality Stores, Inc. _____
U.S. _______ 134 S.Ct. 1395 (2014). The Court, in a unanimous decision, observed that
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TAXATION OF TERMINATIONS,
SETTLEMENTS AND JUDGMENTS
Page |2
Congress used extremely broad language in defining wages for FICA purposes and that
severance payments clearly fall within that definition.
There is a certain, limited, exception from FICA tax when severance payments are tied to
the receipt of state unemployment benefits. In such case, the payments are exempt from FICA
taxation but not income tax withholding. Rev. Rul. 90-72. This would seem to be contrary to
the Supreme Court’s decision in U.S. Quality Stores, Inc. which held that wages for FICA is
defined broadly and includes severance pay. The Court identified this inconsistent treatment by
the IRS in Revenue Ruling 90-72. Consequently, the IRS has been given a green light by the
Supreme Court to tax supplemental unemployment benefits for FICA tax purposes if it so
desired.
Back Pay. Back pay is compensation paid to an individual to compensate him or her for
pay he or she would have received up to the time of settlement or court award but for the
employer's wrongful conduct. For example, back pay is awarded to an employee if he or she is
illegally terminated by an employer, or to an applicant for employment who is not hired for
illegal reasons. In most cases, back pay is taxable, subject to FICA and income tax withholding,
and must be reported on Form W-2 in the year payment is received (rather than the year payment
should have been received). Cleveland Indians Baseball Co. v. U.S. 532 U.S. 200 (2001). Back
pay for lost wages received on account of personal physical sickness or physical injury is not
subject to FICA and income tax withholding. Anderson v. United States, 929 F.2d 648, 654
(Fed. Cir. 1991) (payments which are excluded from IRC § 61’s definition of “gross income” are
not subject to income tax or FICA withholding).
In the Eighth Circuit, back pay (and front pay) awarded for an illegal refusal to hire is not
subject to FICA and income tax withholding. Newhouse v. McCormick & Co., 157 F.3d 582; 82
AFTR 2d ¶98-6576 (8th Cir. 1998) (explaining that no employment relationship existed so
character of the payment could not be “wages”). However, the back pay is taxable to the
recipient and reportable by the payer on Form 1099-MISC, Box 3 Other Income. In every other
Circuit, such back pay is subject to FICA and income tax withholding and reportable on Form
W-2. Rev. Rul. 78-176; see also IRS Publication 957.
Front Pay. Front pay is paid to an individual to compensate him or her for pay he or she
would have received after the settlement date or court award but for the employer's wrongful
conduct and the circumstances—e.g., extreme animosity between the employer and employee—
which make it impracticable to place the employee in the position. Front pay in all Federal
Circuit courts except the Fifth Circuit is considered wages subject to FICA and income tax
withholding and must be reported on Form W-2. Gerbec v. United States, 164 F.3d 1015, 1026
(6th Cir. 1999); Mayberry v. United States, 151 F.3d 855, 860 (8th Cir. 1998); and Hemelt v. United
States, 122 F.3d 204, 209 (4th Cir. 1997). The Fifth Circuit holds that only back pay is subject to
FICA and income tax withholding. Dotson v. U.S., (CA 5 1996) 78 AFTR 2d ¶96-5436 (“wages”
is compensation for services already performed, not for services that will not be performed).
However, front pay in the Eighth Circuit is exempt from FICA and income tax withholding when no
employment relationship existed. Newhouse v. McCormick & Co., 157 F.3d 582; 82 AFTR 2d
699 Walnut Street, Suite 1600, Des Moines, IA 50309
Phone: 515.244.2600
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TAXATION OF TERMINATIONS,
SETTLEMENTS AND JUDGMENTS
Page |3
¶98-6576 (8th Cir. 1998)
Employment Contracts. An amount paid to an employee as consideration for
cancellation of an employment contract and relinquishment of contract rights is ordinary income,
and wages for purposes of FICA, FUTA, and Federal income tax withholding. Rev. Rul. 2004110. Prior to the issuance of Revenue Ruling 2004-110, severance payments made to an
employee in consideration for early termination of an employment contract was not considered
“wages” or compensation, but ordinary income and not subject to FICA, FUTA or income tax
withholding. Rev. Rul. 74-252; Rev. Rul. 58-301; Rev. Rul. 55-520.
Amounts Paid in Settlement of Personal Injury Suits. Damages and other amounts
received on account of certain personal injuries or sickness are excludable from the recipient’s
income. Code Sec. 104(a)(2). This rule applies to amounts received as a result of a lawsuit or the
settlement of a lawsuit or under workers’ compensation acts. In the past, the rule was liberally
applied and permitted the exclusion of amounts received on account of nonphysical, tort or
tortlike injuries such as emotional distress. However, as a result of a law change, for amounts
received after August 20, 1996, and in tax years ending after that date, Code Sec. 104(a)(2) has
been amended to provide that the exclusion applies to damages other than punitive damages that
are received on account of personal, physical injuries or physical sickness. Code Sec. 104(a)(2),
as amended by the Small Business Job Protection Act of 1996 (P.L. 104-188). In addition, if an
action has its origin in a physical injury or physical sickness, then all damages (other than
punitive damages) that flow therefrom are treated as payments received on account of physical
injury or physical sickness whether or not the recipient of the damages is the injured party. For
example, damages (other than punitive) received by an individual on account of a claim for loss
of consortium due to the physical injury or physical sickness of such individual’s spouse are
excludable from gross income. Conf. Rept. to the Small Business Job Protection Act of 1996
(P.L. 104-188); PLR 2001121031 (taxpayer’s loss of consortium claim excludable resulting from
spouse’s asbestos-related disease). In addition, damages (other than punitive) received on
account of a claim for wrongful death continue to be excludable from taxable income as under
prior law.
Damages Received on Account of a Nonphysical Injury or Sickness, Such As Age
Discrimination or Injury to Reputation, Are Not Excludable From Gross Income. The 1996
amendment to Code Sec. 104(a)(2), in effect, prospectively overturns court decisions which held
that damages attributable to nonphysical personal injuries or sickness may be excludable under
that section. As under the former rule, the IRS clearly views back pay received in satisfaction of
a claim for denial of a promotion due to employment discrimination under Title VII as taxable
income because it is not attributable to a personal injury or sickness. Rev. Rul. 96-65.
Damages for emotional distress and the physical symptoms of emotional distress may not
be treated as damages on account of a personal, physical injury or sickness, except for amounts
paid for medical care that is attributable to emotional distress. Code Sec. 104(a), as amended by
P.L. 104-188; Rev. Rul. 96-65; Wells v. Commissioner, TC Memo 2010-5. However, damages
for emotional distress and similar nonphysical injuries or sickness remain excludable from a
699 Walnut Street, Suite 1600, Des Moines, IA 50309
Phone: 515.244.2600
Fax: 515.246.4550
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TAXATION OF TERMINATIONS,
SETTLEMENTS AND JUDGMENTS
Page |4
recipient’s taxable income to the extent that they are attributable to a physical injury or sickness
House Committee Report to P.L. 104-188.
Payroll Withholding on Amounts in Settlement of Personal Injury Suits and
Nonphysical Injury Suits. Personal injury damages are not “wages” for purposes of FICA,
FUTA and income tax withholding. Anderson v. United States, 929 F.2d 648, 654 (Fed. Cir.
1991) (payments which are excluded from IRC § 61’s definition of “gross income” are not
subject to income tax or FICA withholding); I.R.C. §§ 3121(a), 3306(b) and 3401(a) (defining
wages subject to withholding as “remuneration for employment”). Any other portion of a
settlement payment which does not represent wages, such as attorney fees and interest, and even
emotional distress, is not subject to payroll taxes, provided the settlement or judgment makes a
specific allocation indicating the amount of nonwage payments. Rev. Rul. 80-364; TAM
200244004 (emotional distress payment not subject to employment tax; provides nice summary
of FICA and tax withholding rules). If no allocation is made, the Internal Revenue Service will
treat the entire payment as wages subject to payroll taxes. Rev. Rul. 80-364. In addition, the
emotional distress must be documented and the allocation reasonable. TAM 200244004.
Therefore, if unnecessary payroll taxes are to be avoided, it is crucial that the settlement
agreement or judgment clearly indicate how much of the total amount received by the
plaintiff constitutes wages subject to withholding and how much represents other types of
payments. If the other type of payment is for emotional distress, the emotional distress
must be real and not simply fabricated at the time of settlement. TAM 200244004.
The Eighth Circuit recently overruled a long standing IRS rule that an employer has an
obligation to withhold income and FICA taxes for employment discrimination even if an
employer/employee relationship never existed. Newhouse v. McCormick & Co. 82 AFTR2d ¶
98-5388 (10/2/98, CA8). The taxpayer, Newhouse, worked for McCormick for 23 years before
being terminated as a result of outsourcing. He worked for an unrelated employer for five years
before applying for a new position at McCormick & Co. but was denied employment due to age
discrimination. A district court granted Newhouse a large settlement for lost back pay and front
pay. McCormick & Co. withheld income tax and FICA tax on the settlement payments but
Newhouse complained and filed suit demanding that McCormick & Co. pay the entire amount.
The Eighth Circuit agreed with Newhouse saying that if no employment relationship ever
existed, the settlement payments cannot be subject to employment taxes (such as FICA) and
income tax withholding. This is contrary to the IRS position set forth in Rev. Rul. 78-176 and in
other Circuits, but it is now the law in the Eighth Circuit. Even though the court held that no
wage withholding or FICA tax was applicable, settlement payments are still subject to income
tax to the recipient.
Misclassification of Employment Status Can Result In Large Penalties. Employers that
misclassify employees as nonemployees or independent contractors will face substantial
financial penalties as the result of not withholding income tax, failing to withhold and pay
employment taxes, and failing to file the correct reports and returns with the IRS, Social Security
Administration (SSA), and state government agencies. The IRS penalty for unintentionally
failing to withhold federal income tax is 1.5% of the wages paid. This assessment is doubled to
699 Walnut Street, Suite 1600, Des Moines, IA 50309
Phone: 515.244.2600
Fax: 515.246.4550
www.dickinsonlaw.com
TAXATION OF TERMINATIONS,
SETTLEMENTS AND JUDGMENTS
Page |5
3% if the employer failed to file an information return (Form 1099-MISC) for the worker with
the IRS. The IRS penalty for unintentionally not withholding the employee's share of Social
Security and Medicare taxes is 20% of the employee's share of the tax. The penalty is doubled to
40% if the employer failed to file an information return for the worker with the IRS. If an
employer intentionally misclassifies the worker as an independent contractor, even after
determining that an employer-employee relationship exists, the above penalties do not apply, and
the employer is liable for the full amount of federal income tax that should have been withheld,
and 100% of the employee's and employer's share of Social Security and Medicare taxes. An
employer misclassifying workers will also be subject to state penalties.
An employer that misclassified workers as independent contractors may have to
retroactively pay employment benefits in addition to employment taxes. In 1996, a federal
appeals court held that Microsoft Corporation, which had agreed to reclassify “freelancers” as
employees after an IRS employment tax audit, also had to include the misclassified workers in its
§401(k) plan and §423 employee stock purchase plan [Vizcaino v. Microsoft Corp., CA9, 78
AFTR 2d 96-6690, 10/3/96].
Dead People's Wages. The Internal Revenue Service has a set of strange and confusing rules for
tax withholding on a deceased employee’s final paycheck. There are three relevant taxes that
need to be managed: Federal income tax withholding, FICA tax withholding and FUTA tax.
• For Federal income tax withholding, the Internal Revenue Service states that no income
tax withholding needs to be made on a deceased employee’s final paycheck and the
wages should never be reported as taxable income (box 1) on the employee’s W-2 Form.
Instead, the gross wages are reported on a Form 1099-MISC (box 3, miscellaneous
income) issued to the estate of the decedent but only if the wages are $600 or more.
• In addition to issuing a 1099-MISC to the estate of the deceased employee, an employer
is required to withhold, account for and pay FICA (both Social Security and Medicare, if
applicable) and FUTA taxes on a deceased employee’s final paycheck if the final
paycheck is delivered in the same calendar year in which the employee died. In such
case, the employee’s W-2 Form for the year will include the final paycheck amount as
gross wages for Social Security (box 3) and Medicare (box 5) purposes (nothing goes in
box 1), subject of course to the Social Security wage limitation. Such inclusion will also
increase the decedent’s wage base for purposes of computing the surviving spouse’s and
dependent’s survivor benefits for Social Security. If the final paycheck is delivered in a
calendar year following the year of death, then no FICA or FUTA taxes need be withheld
or paid by the employer. Clearly, this may present some planning opportunities for the
employer and the estate. Assuming FICA taxes are substantial, the estate and the
employer would be better off to postpone receipt of the decedent’s final paycheck until
the next calendar year, even though it may slightly reduce Social Security survivor
benefits. Such a decision should be joint. If not a joint decision, an employer has an
obligation to pay the decedent’s last wages upon demand by the decedent’s duly
appointed executor or administrator.
699 Walnut Street, Suite 1600, Des Moines, IA 50309
Phone: 515.244.2600
Fax: 515.246.4550
www.dickinsonlaw.com
TAXATION OF TERMINATIONS,
SETTLEMENTS AND JUDGMENTS
Page |6
For further information on withholding and payment of taxes from a deceased employee’s wages
or salary, see Internal Revenue Service Revenue Ruling 86-109 and instructions to Form W-2.
Attorney Fees Paid Out of Judgment or Settlement Award. Until two recent events,
plaintiffs receiving taxable judgment or settlement awards would direct the defendant to pay the
plaintiff’s attorney fees directly to the attorney from the judgment or settlement proceeds. The
Second, Fifth, Sixth, Ninth and Eleventh Circuits held that attorney fees paid directly to
plaintiff’s attorney by the defendant was not gross income to the plaintiff. Raymond v. U.S. 91
AFTR 2d 2003-535 (D.C. VT 12/17/2002); Srivastava, Sudhir P. v. Comr, 220 F.3d 353 (5th
Cir. 2000); Clarks, Arthur L Estate v. U.S., 202 F.3d 854 (6th Cir. 2000); Banaitis v. Comr. 340
F.3d 1074 (9th Cir. 2003), cert. granted, No. 03-907 (S.Ct. Mar. 29, 2004); Foster, Mattie v. U.S.
106 F. Supp 2d 1234 (DC Ala. 2000). All the other circuit courts and the IRS held that the
plaintiff was taxable on the entire judgment or settlement award with an offsetting deduction for
the attorney fees. The deduction, however, was limited and in some cases completely
unavailable due to the Alternative Minimum Tax.
The first event that changed the legal landscape regarding the taxation of judgment or
settlement awards was the enactment of the American Jobs Creation Act of 2004. The American
Jobs Creation Act of 2004 provides that in cases of “unlawful discrimination” a plaintiff’s
attorney fees and costs may now be deducted by the plaintiff in calculating adjusted gross
income (an above-the-line deduction). Codified at IRC §§ 62(a)(20) & (e). The deductions may
not exceed the amount includible in income by the plaintiff. Thus, the deduction will apply only
in cases of unlawful discrimination in which the plaintiff received an award or a settlement of
damages that are taxable to the plaintiff. The deduction would not apply if the damage award or
settlement were nontaxable (such as awards on account of a personal injury) and would not apply
if the plaintiff were not successful in receiving a damage award or settlement.
The second event was a decision issued by the United States Supreme Court on January
25, 2005. In Commissioner v. Banks and Banaitis, 543 U.S. 426 (2005), the Court held that
attorney fees paid to a plaintiff’s attorney is taxable to the plaintiff regardless of whether the
plaintiff is or is not entitled to a deduction for the attorney fees. The Court reasoned that the law
of agency applies to such cases where the attorney is the agent and the plaintiff is the principal.
The attorney, in his capacity as agent, is “duty bound to act only in the interests of the principal
and so it is appropriate to treat the full amount of the recovery as income to the principal.”
In summary, in all situations in which a judgment or settlement award is taxable, the
plaintiff is required to include in taxable income the full amount of the judgment or settlement
award. The plaintiff will then be entitled to an above-the-line deduction for attorney fees if the
judgment or settlement award arose due to unlawful discrimination. In all other cases, the
plaintiff will be entitled to a below-the-line deduction for attorney fees which may be limited by
the alternative minimum tax or otherwise. If the settlement agreement between the plaintiff and
defendant requires the defendant to pay the plaintiff’s attorney fees directly to the plaintiff’s
attorney, two Form 1099-MISCs must be generated. The first will report the amount of attorney
fees in Box 3, Other Income, and be issued to the plaintiff. The second will report the amount of
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attorney fees in Box 14 and be issued to the plaintiff’s attorney. Treas. Reg. §§ 1.6041-1(f);
1.6045-5.
W:\DOCS\CLIENT\FIRM\DREPP\00199289.DOC
Tax and Reporting Treatment of Judgment/Settlement Payments to
Employees (reprinted from Chief Counsel Memorandum PMTA 2009-035)
Tax and Reporting
Treatment of
Judgment/Settlement
Payments to Employees
Payment Character
Back pay (other than
lost wages received on
account of personal
physical injury or
physical sickness)
Front pay
Dismissal/severance pay
Compensatory or
consequential damages
paid on account of
personal physical
injuries or physical
sickness
Compensatory damages
not paid on account of
personal physical
injuries or physical
sickness (e.g., emotional
distress)
Consequential damages
not paid on account of
personal physical
injuries or physical
sickness
Punitive/Liquidated
damages
Interest
Costs
Medical expenses
Overtime
Restoration of benefits:
Health Premiums, TSP
employee and employer
contributions, and
retirement contributions
Taxes—employee
income tax or employee
Income
Taxable?
Yes
Wages (FICA
and ITW)?
Yes 1
Reporting
Requirement
W-2
Yes 2
Yes
Generally,
no
Yes
Yes
No
W-2
W-2
None
Generally,
yes
No
1099-MISC, Box 3
Yes
No
1099-MISC, Box 3
Yes
No
1099-MISC, Box 3
Yes
No
Yes
Generally,
no
Yes
To be
determined
No
No
1099-INT, Box 1 (if
$600 or more)
1099-MISC, Box 3
None
Yes
To be
determined
W-2
To be determined
Yes
Yes. See
Publication 15-A
W-2
portion of FICA
Travel—if requirements
No
No
No
of § 62(c) (accountable
plan) are met
Travel—if requirements
Yes
Yes
W-2
of § 62(c) are not met
1
In the Eighth Circuit, back pay (and front pay) awarded for an illegal refusal to hire is not subject
to FICA and income tax withholding. Newhouse v. McCormick & Co., 157 F.3d 582; 82 AFTR
2d ¶98-6576 (8th Cir. 1998) (explaining that no employment relationship existed so character of
the payment could not be “wages”).
2
The Fifth Circuit holds that only back pay is subject to FICA and income tax withholding. Dotson v.
U.S., (CA 5 1996) 78 AFTR 2d ¶96-5436 (“wages” is compensation for services already
performed, not for services that will not be performed).
Tax and Reporting Treatment of Attorneys’ Fees
Total Employer Payment Made Jointly to Attorney and Employee:
Nature of Payment
Income Taxable to
employee?
Yes—attorneys’
fees generally
taxable to
employee.
Reporting to
Employee
Attorneys’ fees
reportable in Box 3
of 1099-MISC (not
W-2). Treas. Reg. §
1.6041-1(f)(1) and
(2).
Court award without
designation of
attorneys’ fees
Yes—attorneys’
fees generally
taxable to
employee.
The total award is
reportable, as
appropriate (on
1099-MISC or W-2).
Settlement payment
Yes—attorneys’
fees generally
taxable to
employee.
To be determined,
based on the nature
of the action. If
wages, reportable on
W-2. If not wages,
reportable in Box 3
of 1099MISC.
Court award
designating
attorneys’ fees1
Reporting to
Attorney
Box 14 of 1099
MISC in the amount
of the check payable
jointly to employee
and attorney. Treas.
Reg. § 1.6045-5(a),
and (f) Ex. 1.
Box 14 of 1099
MISC in the amount
of the check payable
jointly to employee
and attorney Treas.
Reg. § 1.6045-5(a),
and (f) Ex. 1.
Box 14 of 1099MISC
in the amount of the
check payable jointly
to employee and
attorney Treas. Reg.
§ 1.6045-5(a), and (f)
Ex.
Separate Employer Payments to Employee, and to Attorney for Attorneys’
Fees:
Nature of Payment
Court award
designating
attorneys’ fees1
Income Taxable to
Employee?
Yes—attorneys’
fees generally
taxable to
employee.
Court award without
designation of
attorneys’ fees
Yes—attorneys’
fees generally
taxable to
employee.
Settlement payment
Yes—attorneys’
fees generally
taxable to
employee.
Reporting to
Employee
Attorneys’ fees
reportable in Box 3
of 1099-MISC (not
W-2) even though
paid separately to
attorney. Treas. Reg.
§1.6041-1(f)(1) and
(2).
The total award is
reportable, as
appropriate (on
1099-MISC or W-2)
even though
attorneys’ fees paid
separately to
attorney. Treas. Reg.
§1.6041-1(f)(1) and
(2).
To be determined,
based on the nature
of the action. If
wages, reportable on
W-2. If not wages,
reportable in Box 3
of 1099MISC.
Reporting to
Attorney
Box 14 of 1099
MISC to attorney in
the amount of check
payable to attorney.
Treas. Reg. §
1.6045-5(a), and (f)
Ex. 3.
Box 14 of 1099
MISC to attorney in
the amount of check
payable to attorney.
Treas. Reg. §
1.6045-5(a), and (f)
Ex. 3.
Box 14 of 1099MISC
to attorney in the
amount of check
payable to attorney.
Treas. Reg. §
1.6045-5(a), and (f)
Ex. 3.
1
Workers rights statutes, such as Title VII, generally include fee-shifting provisions.
Total Employer Payment to Employee:
Nature of Payment
Court award
designating
attorneys’ fees1
Court award without
designation of
attorneys’ fees
Income Taxable to
Employee?
Yes—attorneys’
fees generally
taxable to
employee.
Yes—attorneys’
fees generally
taxable to
employee.
Reporting to
Employee
Attorneys’ fees
reportable in Box 3
of 1099-MISC (not
W-2). Treas. Reg. §
1.6041-1(f)(1) and
(2).
The total award is
reportable, as
appropriate (on
1099-MISC or W-2).
Reporting to
Attorney
None. See, e.g.,
Treas. Reg. §
1.6045-5(a), (d)(4),
and (f) Ex. 4.
None. See, e.g.,
Treas. Reg. §
1.6045-5(a), (d)(4),
and (f) Ex. 4.
Settlement payment
Yes—attorneys’
fees generally
taxable to
employee.
To be determined,
based on the nature
of the action. If
wages, reportable on
W-2. If not wages,
reportable in Box 3
of 1099MISC.
None. See, e.g.,
Treas. Reg. §
1.6045-5(a), (d)(4),
and (f) Ex. 4.
Total Employer Payment to Attorney:
Nature of Payment
Court award under
fee-shifting statute
designated as
attorneys’ fees1
Income Taxable to
Employee?
Yes—attorneys’
fees generally
taxable to
employee.
Court award
without
designation of
attorneys’ fees
Yes—attorneys’
fees generally
taxable to
employee.
Settlement
payment
Yes—attorneys’
fees generally
taxable to
employee.
Reporting to
Employee
Attorneys’ fees
reportable in Box 3
of 1099-MISC (not
W-2). Treas. Reg. §
1.6041-1(f)(1) and
(2).
The total award is
reportable, as
appropriate (on
1099 or W-2).
To be determined,
based on the nature
of the action. If
wages, reportable on
W-2. If not wages,
reportable in Box 3
of 1099MISC.
Reporting to
Attorney
Total amount of check
reported on 1099
MISC, box 14. Treas.
Reg. § 1.6045-5(a)
and (d)(4).
Total amount of check
reported on 1099
MISC, box 14. Treas.
Reg. § 1.6045-5(a)
and (d)(4).
Total amount of check
reported on 1099MISC, box 14. Treas.
Reg. § 1.6045-5(a)
and (d)(4).
1
Workers rights statutes, such as Title VII, generally include fee-shifting provisions.