In California FEHA settlements, plaintiffs often recover damages for both emotional distress and lost wages'but how are those payments taxed? Employers often compel an allocation in damages between wages (economic loss) and emotional distress. In California FEHA (Fair Employment and Housing Act) litigation settlements, the tax treatment of emotional distress damages depends on whether they're related to physical injury or physical sickness.
How the IRS Treats Emotional Distress Damages
Understanding how the IRS differentiates emotional distress damages is essential in employment-related settlements. The key distinction hinges on whether the distress stems from physical injury or sickness'this determines whether it's taxable.
- If the emotional distress is not attributable to physical injury or physical sickness, the damages are typically taxable income and would be reported on Form 1099-MISC (in Box 3 "Other Income").
- If the emotional distress is attributable to physical injury or physical sickness, those damages are generally not taxable and wouldn't require a 1099.
What This Means for FEHA Cases
FEHA cases frequently involve claims of emotional distress arising from discrimination...
