How to deal with lawsuit proceeds


J

John

When I left my last job I was owed a fair amount of back
pay. My employer told me to sue him. I did, and a year
later he agreed to pay me the backpay, interest and legal
fees over several years. He is not calling it pay, and is
not issuing a W2 or making social security payments.

My lawyer says that is fine; lawsuit settlements are
ordinary income. An accountant doubts the IRS would buy
that; he says I have to call it self employment income and
pay social security tax on it. (presumably just the back
pay, rather than the interest or legal fees)

Any informed opinions on how to handle this? I expect there
are thousands of these each year, so there must be a right
way to handle it.
 
Ad

Advertisements

A

Arthur L. Rubin

John said:
When I left my last job I was owed a fair amount of back
pay. My employer told me to sue him. I did, and a year
later he agreed to pay me the backpay, interest and legal
fees over several years. He is not calling it pay, and is
not issuing a W2 or making social security payments.
In the event I failed to reply previously (sorry, moderator,
but I post from two computers and 3 newsservers), it's
definitely WAGES. It cannot be self-employment income.

Since it's a FORMER employer, why not go through the
proceedures of requesting a W-2 (which would probably be
denied), and then requesting the IRS for leave to file a
substitute W-2.
 
M

Mike Lewis

John said:
When I left my last job I was owed a fair amount of back
pay. My employer told me to sue him. I did, and a year
later he agreed to pay me the backpay, interest and legal
fees over several years. He is not calling it pay, and is
not issuing a W2 or making social security payments.

My lawyer says that is fine; lawsuit settlements are
ordinary income. An accountant doubts the IRS would buy
that; he says I have to call it self employment income and
pay social security tax on it. (presumably just the back
pay, rather than the interest or legal fees)

Any informed opinions on how to handle this? I expect there
are thousands of these each year, so there must be a right
way to handle it.
I agree with the accountant.

Mike Lewis, CPA
 
D

D. Stussy

John said:
When I left my last job I was owed a fair amount of back
pay. My employer told me to sue him. I did, and a year
later he agreed to pay me the backpay, interest and legal
fees over several years. He is not calling it pay, and is
not issuing a W2 or making social security payments.

My lawyer says that is fine; lawsuit settlements are
ordinary income. An accountant doubts the IRS would buy
that; he says I have to call it self employment income and
pay social security tax on it. (presumably just the back
pay, rather than the interest or legal fees)
It's NOT self-employment income, especially since you were
an employee. It's going to be your former employer's FICA
tax nightmare should the IRS figure this one out....
Any informed opinions on how to handle this? I expect there
are thousands of these each year, so there must be a right
way to handle it.
To pay your SHARE of the FICA, see form 4137, assuming that
the amount you won wasn't already reported in your W-2 for a
prior year. The "origin of the claim" doctrine says that
the amount you settled for will be wages.
 
J

John

In the event I failed to reply previously (sorry, moderator,
but I post from two computers and 3 newsservers), it's
definitely WAGES. It cannot be self-employment income.

Since it's a FORMER employer, why not go through the
proceedures of requesting a W-2 (which would probably be
denied), and then requesting the IRS for leave to file a
substitute W-2.
Presumably I have to pay my share of FICA this way. Does
the IRS go after the company for their share?

From what I read on the internet, you have to have a copy of
your last payroll check to get a substitute W-2. I don't
have a payroll check, just a company check, which I didn't
bother to save the stubs, since the payments are all
detailed in the settlement. (I probably should start saving
them to avoid future problems) Would this cause me a problem
with the substitute W2?
 
Ad

Advertisements

J

John

To pay your SHARE of the FICA, see form 4137, assuming that
the amount you won wasn't already reported in your W-2 for a
prior year. The "origin of the claim" doctrine says that
the amount you settled for will be wages.
I agree with it in principle; it certainly is wages and
ideally should be treated as such, but 4137 is specifically
for tips that were not reported to my employer. This is
wages paid directly by the employer. Are you sure about
this?!?!

No, the wages have never been reported.

I asked the IRS this same question. They replied that the
settlement is taxable; but gave no guidance and to how.
 
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top