Settlement and taxes

[ua_guy]

A check for $2100 showed up in the mail yesterday. Someone I worked with at a former employer started a class-action against them 3 years ago. Long story short, the employer had a known history of discouraging and disallowing meal breaks and mandatory rest periods. The company settled, and of course they deny wrong-doing, but the checks being written confirm what we all know. I've heard some impressive checks have been written to some of their longer-term employees. There is no NDA, but cashing the check officially settles any claim I'd have against them. This is fine.

My settlement includes interest over the 5-year period since I last worked there -- the guy got them for interest too. Ouch. I'm curious if anyone has any clue as to how taxes on this will be calculated. It's a settlement, and it's not bodily-injury, so in general it is taxable--but how? It's also income that I should have received in the past. Is the interest taxed differently? Not that any of this is going to make/break me, I'm just curious as I've never had to deal with anything like this before. As part of the check they issued 1099-INT and 1099-MISC forms.

[james.hendrickson]

Is it considered regular income?

[myrdale]

Unless you were emotionally distressed, I think you'd have to pay taxes on it. Personally the IRS causes me emotional distress every time I look at my pay stub. I would assume you'd have to report it with your other tax documents when you file.

https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments

[ua_guy]

That's why I'm confused. Some of it is interest. But technically the other portion is income. All issued as a settlement. LOL. I think we're hiring an accountant this year for some other things and since the check was issued before 2023, it goes on 2022's taxes. If it turns out to be interesting, I'll post a story about it here. I'm guessing a lot of that check will be eaten up by taxes. Oh well, better than a kick in the pants.

No, I wasn't emotionally distressed. I love days when checks show up in the mail. The boss watching the porta-potties from his pickup at job sites was a little weird, though. Maybe it was a fetish.

[QuarterMillionMan]

Big government who I work for once had pay out a class action settlement similar to ua_guy's former employer. 150+ employees each got a check based on longevity as well. Big government was not paying for overtime worked, although whenever I claimed OT, I got paid. My check was similar in size to ua_guy's check. However, I cannot recall for the life of me if I had to pay taxes on it or not. The year was about 2007.

[myrdale]

I am not promoting tax fraud, but I am curious if they will send you a W-2 or some similar document. If they do, then it is easy, you have to report it. If they don't, then maybe let it slide.

[disneysteve]

I am not promoting tax fraud, but I am curious if they will send you a W-2 or some similar document. If they do, then it is easy, you have to report it. If they don't, then maybe let it slide.

They sent a 1099. It gets reported as miscellaneous income. And the interest gets reported as such.

[kork13]

They sent you the 1099INT & MISC, which makes things relatively easy. The money will just be taxed as ordinary income, just like any other 1099INT/MISC, at whatever marginal rate you fall into.

[ua_guy]

They sent you the 1099INT & MISC, which makes things relatively easy. The money will just be taxed as ordinary income, just like any other 1099INT/MISC, at whatever marginal rate you fall into.

I'm hoping it's that easy. Never received a settlement that came with tax forms before.

[kork13]

I wouldn't worry. While the backstory is complicated, the taxes are not. They actually did you a favor by issuing the 1099s -- they're standardized forms, and are treated in a standardized manner. Especially if you do your taxes using an online software or similar, it's just another form that you include when you work through the program. I learned about the simplicity of 1099MISC when we became eligible for the Alaska PFD. Those payments are also taxed via the 1099MISC, and it's very simple. In most cases, the IRS doesn't care WHY you've got the 1099MISC, only that you do report it on your tax return.

[myrdale]

They sent a 1099. It gets reported as miscellaneous income. And the interest gets reported as such.

I missed that in the original post.

Yeah you have to pay taxes on it.