The first payment received for lost wages may have been reported on an IRS form W-2. I would expect the lost wages for the second payment received in January 2025 will also be reported on an IRS form W-2.
In January 2025, you received the second larger check in compensation for emotional distress punitive damages with a breakdown of 20% towards lost wages and 80% for the punitive damages.
IRS form 4345 states:
If you receive a settlement in an employment-related lawsuit; for example, for unlawful discrimination or involuntary termination, the portion of the proceeds that is for lost wages (i.e., severance pay, back pay, front pay) is taxable wages and subject to the social security wage base and social security and Medicare tax rates in effect in the year paid. These proceeds are subject to employment tax withholding by the payer and should be reported by you as wages on Line 1a of Form 1040, U.S. Individual Income Tax Return.
To estimate taxes owed, in TurboTax Online, enter the income as follows:
- Select Federal from the left side menu.
- Click on Wages & Income.
- Click the down arrow to the right of Less Common Income.
- Click to the right of Miscellaneous income….
- Click to the right of Other income not already reported on a Form W-2 or Form 1099.
- Did you receive any other wages, select Yes. Continue.
- At the screen Any Other Earned Income, select Yes. Continue.
- At the screen Enter Source of Other Earned Income, select Other. Continue.
- Enter the income. Select Done.
The entry is found on line 1h of the IRS form 1040 income tax return.
IRS form 4345 states:
Punitive Damages
Punitive damages are taxable and should be reported as “Other Income” on line 8z of Form 1040, Schedule 1, Additional Income and Adjustments to Income, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.
To estimate taxes owed, in TurboTax Online, enter the income as follows:
- Select Federal from the left side menu.
- Click on Wages & Income.
- Click the down arrow to the right of Less Common Income.
- Click to the right of Miscellaneous income….
- Click to the right of Other reportable income.
- At the screen Any Other Taxable Income, select Yes.
The entry is fund on line 8z of Schedule 1 Additional Income and Adjustments to Income.
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