Filed claim for sexual harassment, wrongful termination that was settled out of court.
Issued a W2 for compensation - no problem
Temp agency that she was working for issued a 1099MISC income in Box 3
Actual company she was working for issued 1099MISC income in Box 7
Company paid attorney fees, she didn't have to pay them out of her settlement, so no issues there.
What I'm reading (IRS lawsuits, awards, and settlements audit techniques guide) is that this is all taxable income, unless she suffered some kind of physical or emotional injury and the income was for medical care (therapy etc)...am I interpreting this correctly?
I cant imagine this being considered NEC income since she got the W2 for compensation, so I'm going to move over it to Other Income.
Am I missing anything that might make any of this potentially non-taxable?
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I think its all taxable too, but I felt bad for her and told her Id do some more research and let her know for sure. It was $12,000 total that she got, she ends up owing about $800 between fed and state, but shes young and everyone wants that refund! LOL so I figured it didn't hurt to ask around.
The 1099 is taxable income, not SE income. Either get it corrected to box 3 or file the Sch C with the gross income and then back it out and put on line 21.
My office manager, when she was *just* a client, was badly injured in a head-on collision (over ten years ago). She had to go thru an attorney to get a reasonable settlement. The F 1099 showed up with the amount as NEC. I still remember the battle I went thru to get it corrected.
I'd get it corrected rather than the in/out on Schedule C just in case there are any questions two/three years from now. The Company might not still be in business then.
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I agree, the audit guide says that sexual harassment settlements are taxable.
You also say "wrongful termination". Is that for missed pay?
As for box 7 ... that is usually for "services" ... sexual harassment ... hmmm.
I think the business messed up and didn't know what they were doing when they put it in box 7.