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Is CA waiting time penalty taxable? California California

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  • Is CA waiting time penalty taxable? California California

    I sued my previous employer and received the following ruling from DLSE:
    $2,000 in overtime wages
    $500 in interest
    $9,000 in waiting time penalty

    The employer gave me 1099 form with the entire amount as other income.

    According to DLSE, the penalty is not wages, thus no deductions should be taken.

    Does this mean that I still have to pay federal/state income tax on the entire amount, or just the wage and interest part?


  • #2
    Ouch. I sort of know this.
    - IRS could not care less what CA-DLSE says or thinks. There is some IRS ruling on CA-DLSE declared penalties, that as far as IRS is concerned, these so-called "penalties" are wages for federal tax purposes (FIT, FICA, FUTA) and that no state ever had any authority to make that sort of decision on federal wage definitions. And legally, IRS is correct.
    - Now if we are talking CA wage definitions only (SIT, SDI, SUTA) then collectively CA can make that decision. I am unclear that CA-DLSE can make decisions that CA-EDD and CA-FTB have to honor, but it is at least possible that these various CA agencies will all play nice with each other. The problem is that CA-DLSE does not make rules on CA-PIT (form 540), that would be CA-FTB. And CA-DLSE also does not make rules on SDI/SUTA, that would be CA-EDD. But still there is a chance that CA-DLSE at least talks to those people and there may actually be an agreement here.

    The following quote is from a 2005 BNA newsletter.

    IRS found that none of the exceptions to the definitions of wages for purposes of Federal Insurance Contribution Act taxes, Federal Unemployment Tax Act taxes, or federal income tax withholding apply to the additional pay authorized by section 226.7 of the California Labor Code. IRS also pointed out that, under federal regulations, the name by which remuneration for employment is designated is immaterial.

    IRS reasoned that the payments, although they are not made in return for actual performance of services, arise from the employment relationship and are analogous to the “idle time” payments by the employer in Rev. Rul. 76–217.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)


    • #3
      Thanks for the reply, DAW.

      So, if it's treated as "idle time", then according to the IRS the entire amount is "wages for the purposes of social security, Medicare, FUTA taxes, and federal income tax withholding".

      I guess I understand that I should pay federal/state income tax on the entire amount. But since the employer gave me a 1099 form without making these deductions, should I really go out of my way to pay the abovementioned taxes? Or should I just report these and pay "whatever turbotax tells me to pay"?

      On another note: I was an independent contractor working for the company, and my tax returns showed me as self-employed. If IRS does not care what CA-DLSE ruling says, then for all intents and purposes - I am still self-employed, and thus I can write-off any business-related expenses... It may work out better than I expected...


      • #4
        I do not know more then I have already said. I am disinclined to guess on your new questions. Sorry.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)


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