Tax Implications for Personnel Settlements
OHR Home Page   jobs.sc.gov   Hot Topics Career Opportunities Employee Services Employer Services Training & Development Statistical Info How to Contact Us OHR Webmail Other Agencies State Employees Weather Alert Workforce Planning Sam Wilkins, Director 1201 Main Street Suite 800 Columbia, SC 29201 Phone: (803) 737-0900		The Spring 1999 issue of the HR Review contained an article entitled "Proper Taxing of Judgments and Settlements." This article raised the awareness to agencies of tax considerations regarding lump sum payments contained in personnel settlements. Questions often arise when parties are attempting to negotiate monetary payments in settlement of employment disputes. This article will attempt to simplify how lump sum payments are subject to taxes and withholdings. Parties to a monetary settlement must first determine the reasons for the payment. This determination will assist in deciding whether the payment is wage-based or non-wage based. If wage-based -- The payment is subject to the standard state and federal withholdings. For example, FICA, FUTA, state unemployment tax, state income tax, and federal tax withholdings will be deducted. The employer is responsible for reporting the wage-based payment on a W-2 Form. Examples of wage-based payments may include: back wages, future wages, allegations of inequity in pay, and misclassification of position. If non-wage based -- These types of payments fall into several categories. Parties will need to determine which categories are appropriate based on the origin of the claim. These categories include: Physical Injuries -- Includes all physical injuries sustained by the party. It may also include pain and suffering resulting from physical injuries. Payments of this nature are non-taxable. Non-Physical Injuries -- Examples of non-physical injuries include defamation, conspiracy, and free speech violations. Payments of this kind are subject to income tax and should be reported by the employer on a Form 1099. Emotional Distress and Mental Anguish -- Parties should first consider whether the emotional distress is caused by a physical or non-physical injury. If the emotional distress is caused by a physical injury the payment is considered non-taxable. If, however, the emotional distress is caused by a non-physical injury, the payment will be taxable income. This income should be reported by the employer on a Form 1099. Other -- Fees such as court costs, attorney’s fees, and interest are subject to tax and should also be reported on a Form 1099. Again, the responsibility for determining whether the lump sum payment is wage-based or non-wage based rests with the parties involved in settling the dispute. To ensure that your settlement is allocated properly, parties should: Identify the basis for the payment Indicate the settlement amount Allocate in writing each dollar of recovery to the respective category If you have any questions regarding monetary settlements and possible tax implications, please contact your agency’s Human Resources Consultant for additional information.

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