So you just settled your employment law case but the deal is not done until the parties have agreed on the plan of how taxes are going to be paid or become due and owing. Who is going to be responsible to the IRS if the parties get it wrong and what happens then? Well the best thing is to get as much money as you can as regular income so there’s no employment taxes taken out, but most employers won’t agree to such a settlement. Usually it’s a division between back pay, from which taxes must be paid (withholding, FICA and social security) and pain and suffering, which can be paid in a lump sum, and so no taxes are taken out. Both of which are treated differently by the IRS code. Don’t forget to check with your tax advisers however because I’m not a CPA and I’m not a tax attorney, and therefore I don’t know what I’m talking about mostly. All I can give you is my experience. Which is that usually how ever much money is going to the employee in a settlement on an employment law case the total gets split down the middle and half of it is treated as a paycheck and half of it is subject to a Form 1099, with no up front monies deducted, for pain and suffering, but you will still have to pay taxes on that the following applicable tax time. Don’t even rely on your lawyer for advice, go talk to the tax guy before you do anything or agree to anything and get this all straightened out in your mind so there are no SURPRISES the next time you file a tax return.
That’s all I’m gonna say about that.