When Judgments on Sexual Harassment Become Taxable

equal pay
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I was raised by a single mother in the 1980s who was both sexually harassed and earned less than her male counterparts. She would have nights where she would come home, go straight to her room and cry.

Here we are in 2018, and the same nonsense is going on. Why can’t we just pay women the same as men, not sexually harass them? It’s so simple. I hire women and pay them the same rate as men for the same job.  

On the front page of The New York Times around the first of the year, there was an open letter from women demanding the end to sexual harassment and equal pay. I tend to believe that there will be a lot of sexual harrassment lawsuits this year, and I wanted to take a moment to talk about the proceeds from lawsuits and the taxability of those awards.

If you sue an employer for sexual harassment and you are awarded a judgment, the amount isn’t taxable to the recipient. That’s provided the award was not based on compensation. For instance, let’s say that you sue your employer because you were sexually harassed. You went to human resources, and they brushed you off. If you sue the company and win a judgment — unless a portion of the judgement is for back pay or compensation — it is not taxable to the recipient. My advice is if you plan to sue, make sure that your tax accountant and attorney have a conversation about how the judgment will be issued.

If you sue your company because all of the men at your company have the same skills and education you do and you do the same job but are paid less, then typically what you are suing for is the difference between the men’s pay and your pay, plus any other damages. The portion of the back pay is taxable, but the compensatory damages are not taxable. At tax time, you will receive a Form 1099 for the back pay.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.


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