First, let's make sure you are not including the amount twice. Did you enter the W-2 amount and/or the 1099 MISC? If so you only need to enter the amount once. If you are unsure which is the correct one, contact the Law firm to clarify. Anyway, in order to avoid self-employment tax you must enter the Form 1099MISC as Other Income.
Her is how to add "Other Income:
Legal settlements are reported as "Other Taxable Income." You may or may not receive a 1099-MISC reporting the income. Regardless, this is how you should enter it:
• Select Federal Taxes
• Select Wages and Income
• Scroll down and select Show More at Other Common Income
• Select Start/Update next to Income from Form 1099-Misc.
• Answer Yes to the question Did you get a 1099-MISC? (even if you didn't get one).
• Complete the top part and then enter the award amount
• Enter a reason for the 1099-Misc.
• Select "This was money from a lawsuit settlement" on the "Does one of these uncommon situations apply?" screen
Interest earned on a lawsuit settlements is taxable income and should be entered as a Form 1099-INT. Punitive damages are taxable and should be reported as “Other Income” on line 21 of Form 1040, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.
You do not need to complete Form 8919. Use Form 8919 to figure and report your share of the uncollected social security and Medicare taxes due on your compensation if you were an employee but were treated as an independent contractor by your employer. By filing this form, your social security earnings will be credited to your social security record.
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