In employment cases, the structure of settlement payments may
have significant tax consequences for clients. Often the tax
consequences depend on whether the settlement payments are for loss
of income damages, which are taxable, or emotional distress types
of damages, which are not.
Wage and hour mediation settlements, especially in California,
may involve somewhat different considerations. In those cases,
emotional distress types of damages often play less of a role. More
often, the tax issues relate to whether the payments are allocated
to wages or to penalties or other types of non-wage payments.
Some General Considerations
Settlement payments to an employee are often reported to taxing
authorities in one of two ways. Wages and other types of payments
considered to be wages are usually reported by a W-2 form issued by
the employer. Non-wage payments are reported by the employer
issuing a form 1099. The type of form used can have significant tax
consequences
