Recent program manager technical assistance from the Office of Chief Counsel (PMTA-2009-035) provides a detailed analysis of the IRS's position on dealing with income and employment tax consequences, as well as appropriate reporting, of employment-related judgment or settlement payments. The PMTA goes on to state that determining the correct treatment of employment-related settlement payments is a four-step process:
* Determine the character of the payment and the nature of the claim that gave rise to the payment;
* Determine whether the payment constitutes an item of gross income;
* Determine whether the payment is wages for employment tax purposes; and
* Determine the appropriate reporting for the payment and any attorneys' fees (Form 1099 or Form W-2).
This item highlights the PMTA's key areas and points out important concepts.
Character of the Payment and Nature of the Claim
There are numerous types of settlement payments or awards that an individual may receive in connection with an employment-related dispute. Some of these payment types include severance pay, back pay, front pay, compensatory damages, consequential damages, and punitive damages. In addition, depending on the specific set of facts and circumstances, the nature of the claim can be tied back into a federal provision or statute. Some of the most widely known of these include title VII of the...
