Yesterday, through a mediation process, an agreement was reached and a settlement amount agreed upon. The attorney & insurance representative are adament about paying the settlement amount on a W-2 rather than on a 1099-Misc. which, according to the IRS, is reportable on a 1099-Misc. I am no longer an employee of the charged party. Per info obtained from the IRS, the settlement amount is not considered as wages, tips, other compensation. There is clearly defined information contained on the IRS website regarding the reporting of settlement (compensatory damages) on 1099's. Why then are they requiring the payment be made on a W-2?

This is really a question for your lawyer.

I did want to point out that regardless of how the information is reported W-2 or 1099; both are reportable on your personal income tax returns. You may want to discuss with your accountant or tax preparer the implications they will have for you.

I fully understand about reporting the amount on my income taxes, however, one issue I have is that a substantial amount of taxes will be deducted on a W-2 as well as social security & medicare. From my research of the IRS, etc. I read that settlement amounts reported on a 1099-Misc. may be taxed at a lower rate as well as not on the entire amount; possibly on only 80% of the amount. I just don't understand the reasoning behind wanting to report it on a W-2. A W-2 represents wages, tips, other compensation to an employee. I am clearly no longer an employee and the amount that is reportable is clearly not wages, etc. The settlement amount is for a wrongful termination, sexual harassment, discrimination charge through the Human Rights Comm.

There are advantages to both.

In the same situation, I'd probably issue a 1099-misc for the settlement amount.

The problem is that neither is right or wrong. It's really the preference of your former employer. Keep in mind that if they issue a W-2, the former employer is flipping part of your "possible" tax obligation (i.e. FICA). It's possible that if issued a 1099-misc you could be held liable for the full FICA contribution (both employer + employee).

Also a point of clarification, the W-2 is intended to report "all" renumeration. It does not specifically have to be wages, tips, bonus or commissions. It could be intangible items such as personal use of a company car, the value of prizes or gifts, etal.

I fully understand why you'd prefer the 1099-misc. Your initial take home amount would be greater. If you are able to obtain this option, there are things you should also consider. For example, it's possible that you could be required to file an "estimated" quarterly return. Not doing so could incur penalties and interest on your annual return. Additionally you could be held liable for the full cost of all taxes (including the employer portions). In essence 1099-misc are generally issued to those who are self-employed. I realize this is not the case per these circumstances; but this the standpoint that IRS and state agencies take when viewing 1099-misc information.

Thank you for the information. If that information was provided by the charged party's atty. I would have more fully understood. However, this was not the case, even though I inquired as to the reason for the W-2 vs. the 1099-Misc. Now, I have another question. Since I am only working part-time (20 hrs. p/week), is it possible request that I may request my # of dependent deductions be changed from 0 to, say 6? This would reduce the amount of taxes that would be deducted. I calculated the actual amount that I would receive and the Fed. tax would exceed $2,000. The amount of the settlement is $7,500 and the actual amount I would receive, after taxes, is under $4,700!!! Any suggestions as to how I can put more $$$'s into my pocket? I really need the $$ to pay off accounts that went into collection due to unemployment for 6 mos. due to my termination.

You are always free to submit a revised W-4 to your employer (or former employer in this case).

I suspect that this may be treated as "supplemental" wages and taxed at a flat 25% for federal income tax. If this is true, it really would not matter how many exemptions you list on your W-4.

Again, thank you for the info. One more question....Is it possible to request that I file as 'exempt' on my W-4 and would this reduce the amount of taxes deducted?

I would never say never.

Claiming "exempt" on your W-4 should reduce federal taxes to zero.

There may be ramifications for filing an invalid W-4. I have seen the IRS become more diligent via filing lock-in letters. When an employer receives a lock-in letter, the employer is required to withhold taxes based on IRS instructions. When this happens, any revised W-4 that the worker submits must be ignored until the IRS issues a release. The ones I've personally received have set the tax calulation to single filing with zero exemptions. This is the highest tax rate.

http://www.irs.gov/govt/fslg/article/0,,id=112714,00.html

My point is that if the payroll processor is diligent, the revised form may not be accepted if he/she knows it to be invalid.

I understand your goal. In the end, you still owe taxes. How's that old saying go: "You can't avoid taxes and death". It certainly holds true here. The best you can hope for is deferring your tax payment until April.