Announcement

Collapse
No announcement yet.

Taxes on Labor Board Claim California

Collapse
X
  • Filter
  • Time
  • Show
Clear All
new posts

  • Taxes on Labor Board Claim California

    Not sure if I am posting in the right forum.

    I won a labor board claim last year, my award was for 71,266.55 and $5,330.35 for interest and $6,206.40 as penalty.

    My $71,266.55 is subject to a W-2, which I understand, but do I pay taxes on the interest and penalties?

    Further, my attorney that represented me also sent me a 1099 for my amount i received after costs and fees, which means I will pay money on the money I was already subject to withholdings.

    Is this proper?

    Please advise.

    Thanks,

  • #2
    I can answer part of this. As far as IRS is concerned, everything of value is considered income (1040) unless IRS explictly says it is not. So you have several unrelated issues here.
    - What is considered to be wages (W2) from the employer's standpoint?
    - What is considered to be reportable income (1099) from the attorney's standpoint?
    - What is considered to be income (1040) from the employee's standpoint?

    There are similar issues but not the same. Easy answer first.
    - I am not expert on 1099 issues from the attorney's standpoint, but a general rule of thumb is that the payer (attorney) wants to report any transaction that IRS might consider taxable. There is no upside to the payer to report on the low side. I have worked for some pretty big employers and we issued 1099s to pretty much everyhone. Our customers followed pretty much the same rule. Most payers report gross value payments on 1099s to any recepient that IRS might be interested in. Under reporting is legally the employer's fault, over reporting is not.
    - From the employers standpoint, the rules changed big time maybe 15 years ago. Once upon a time, there was a loosely worded exception for "damanges", which meant that attornies would negotiate settlements which called everything a "damage". IRS changed the rules and it is next to impossible for a payment to a "damage" unless a court says so, and unless it also fits into a very narrow set of IRS rules. The interest and penalties and almost certainly wages. I have not read your settlement agreement and I have not read the very current set of IRS rules on this for a while, but the last time I did this, everything you mentioned would have been wages (W2).
    - Now I am not a personal tax guy (1040) but duplicate reporting with both a W2 and 1099 is not a big deal. IRS changed the lawyer rules on settlements big time 15 years ago, which is likely why the duplicate reporting is occuring. I cannot advise you on the 1040 rules because I have never had a reason to research them. But off the top of my head, lets say that Bob receives $10K gross (wages, penaltiy, interest, everything), and $4K goes to the lawyer, $6K stays with the employee. My understanding (not researched in a while) is that taxable wages to the employee is $10K, not $6K, and n ot $14K (W2 +1099). Now maybe there is some sort of 1040 deduction for the attorney fees, maybe not. But unless IRS changed this backed, the emploeyr was instructed to report the ENTIRE settlement, not less attorney fees, as wages starting 15 years ago. At the same time, the 1099 reporting of payments made to the attorney also changed.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

    Comment


    • #3
      Click image for larger version

Name:	Award.jpg
Views:	1
Size:	67.4 KB
ID:	1571418

      Attached is the award language... no withholding or deductions from the penalty or interest...


      Originally posted by DAW View Post
      I can answer part of this. As far as IRS is concerned, everything of value is considered income (1040) unless IRS explictly says it is not. So you have several unrelated issues here.
      - What is considered to be wages (W2) from the employer's standpoint?
      - What is considered to be reportable income (1099) from the attorney's standpoint?
      - What is considered to be income (1040) from the employee's standpoint?

      There are similar issues but not the same. Easy answer first.
      - I am not expert on 1099 issues from the attorney's standpoint, but a general rule of thumb is that the payer (attorney) wants to report any transaction that IRS might consider taxable. There is no upside to the payer to report on the low side. I have worked for some pretty big employers and we issued 1099s to pretty much everyhone. Our customers followed pretty much the same rule. Most payers report gross value payments on 1099s to any recepient that IRS might be interested in. Under reporting is legally the employer's fault, over reporting is not.
      - From the employers standpoint, the rules changed big time maybe 15 years ago. Once upon a time, there was a loosely worded exception for "damanges", which meant that attornies would negotiate settlements which called everything a "damage". IRS changed the rules and it is next to impossible for a payment to a "damage" unless a court says so, and unless it also fits into a very narrow set of IRS rules. The interest and penalties and almost certainly wages. I have not read your settlement agreement and I have not read the very current set of IRS rules on this for a while, but the last time I did this, everything you mentioned would have been wages (W2).
      - Now I am not a personal tax guy (1040) but duplicate reporting with both a W2 and 1099 is not a big deal. IRS changed the lawyer rules on settlements big time 15 years ago, which is likely why the duplicate reporting is occuring. I cannot advise you on the 1040 rules because I have never had a reason to research them. But off the top of my head, lets say that Bob receives $10K gross (wages, penaltiy, interest, everything), and $4K goes to the lawyer, $6K stays with the employee. My understanding (not researched in a while) is that taxable wages to the employee is $10K, not $6K, and n ot $14K (W2 +1099). Now maybe there is some sort of 1040 deduction for the attorney fees, maybe not. But unless IRS changed this backed, the emploeyr was instructed to report the ENTIRE settlement, not less attorney fees, as wages starting 15 years ago. At the same time, the 1099 reporting of payments made to the attorney also changed.

      Comment


      • #4
        I understand what you are saying. The problem is this. California law is applicable to CA only. IRS is already on record that while CA may consider certain penalties to be not subject to CA taxes, that CA has no authority what-so-ever over federal taxes and that as far as IRS is concerned, CA statutory penalties are wages for federal purposes. And I was very cereful with my answer to talk about federal rules only.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

        Comment

        Working...
        X