APA's Top Payroll Questions & Answers for 2020 - 24

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APA's Top Payroll Questions & Answers for 2020

Settlement for lost wages

Taxable and Nontaxable Compensation

Q.

How should a settlement for lost wages be taxed at the federal level for
an employee whose employment has terminated?

A.

When employees win lawsuits or settlements against their employer for
alleged violations of federal and state employment laws (e.g., wagehour, anti-discrimination, labor-management), the amounts awarded
are usually considered back pay for wages unlawfully denied. As such,
the IRS has generally ruled that they are subject to federal income
tax withholding and social security, Medicare, and FUTA taxes. These
awards would be taxable in the year that they are paid to the former
employee and would be reported on the former employee's Form W-2.
The basic rules governing the taxability of back pay awards and
other damages received in employment-related lawsuits are contained
in IRC §104(a), which was amended in 1996 to exclude from income
only damages received on account of personal physical injuries or
physical sickness. Damages recovered from an employment-related
dispute generally are not recoveries for a personal physical injury. Also,
settlements or awards for emotional distress are not recoveries for a
physical injury and are therefore subject to federal employment taxes.
There may be other considerations that must be reviewed that go
beyond the wages itself. A judgment or settlement payment may be
made up of several elements, each of which may or may not be wages.
In the case of a settlement payment, the parties must determine the
elements of the settlement amount. This determination is made by
considering all the facts and circumstances, including the remedies
available for the particular claim.
Find out more about the tax consequences of back pay awards in
The Payroll Source®, §3.4-3.

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APA's Top Payroll Questions & Answers for 2020

Table of Contents for the Digital Edition of APA's Top Payroll Questions & Answers for 2020

Table of Contents
APA's Top Payroll Questions & Answers for 2020 - Intro
APA's Top Payroll Questions & Answers for 2020 - Cover1
APA's Top Payroll Questions & Answers for 2020 - a
APA's Top Payroll Questions & Answers for 2020 - b
APA's Top Payroll Questions & Answers for 2020 - c
APA's Top Payroll Questions & Answers for 2020 - Table of Contents
APA's Top Payroll Questions & Answers for 2020 - e
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