Tax Issues in Employment Settlements

Originally published in 2001

Employment-related disputes are usually resolved in one of two ways. Either the case proceeds to judgment, or the parties negotiate a settlement before a j udgment is rendered. The parties also may negotiate a settlement after a judgment is rendered in order to avoid the appeals process. This outline focuses primarily on the tax issues of employment-related settlements. Nevertheless, the manner in which an employmentrelated dispute is settled has little, if any, significance for federal tax purposes. See Longino Est. v. Comm'r, 32 T.C. 904 (1959) (settlement); Levens v. Comm'r, 10 T.C.M. 1083 (1951) (arbitration award). Thus, the tax rules relating to settlement payments remain the same if the dispute proceeds to judgment.