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 judgment 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.
If you receive an award for a car accident, slip and fall, or any other nonsense like that, typically the amount isn’t taxable unless part of the award is based on the pay that you lost out on when you were recovering.
Under the new tax law, the Tax Cuts and Jobs Act, alimony in a divorce is no longer deductible to the person that pays it and no longer taxable to the receipient.
Most legal settlements are structured settlements, meaning you receive the amount over time. The question remains as to when would the tax be due if you haven’t received all of the income in the year of the award. The answer is that you will receive a 1099 for the full amount in the year of the award but haven’t received all of the money. The question is whether the full amount would be taxable even though you didn’t receive the money
Most individuals are cash basis taxpayers, meaning that when they receive the income it is taxable. With a structured settlement you have received the 1099, so the IRS thinks it’s taxable. So what do you do? Simply, you put the 1099 on the tax return, so you don’t get a nasty CP-2000 Notice. You then back out the amount paid for wages that wasn’t received in the year. In the subsequent years, you pick the amount up as taxable.
It is common for someone with a structured settlement to cash it in to a company for a discount. If that happens, you pick up the income in full and calculate the discount rate as it relates to the taxable portion, and deduct it.
The question I am always asked is whether income from a legal award is taxable. As you have read, it depends.
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...