The income is taxable but it is not self-employment and does not need Schedule C. To get TurboTax to stop asking for Schedule C, you have to answer the follow-up questions as below. You may want to delete the 1099-MISC and re-enter it as sometimes editing does not provide the desired outcome. Re-enter the form and description, and mark the box when asked about uncommon situations - This money was from a lawsuit settlement. Mark NO on the pop-up about back wages. The W-2 has the wages portion of the settlement. Be sure to enter the W-2 in the W-2 section of TurboTax.
The attorney's fees you paid may be deductible. If so, they are entered as an adjustment to income on the same line (Line 8 of Schedule 1) as the Form 1099-MISC income will be reported on. The gross income from which the attorney's fees can be adjusted includes the amounts received for the unlawful discrimination/civil rights judgments. Amounts collected for lost wages (W-2 amount), interest, or punitive damages are taxable and not deductible. @Dawn Y1
Taxation of Legal Settlements
- Physical injury or sickness settlements (dog bites, mesothelioma, etc.) are non-taxable and don't need to be reported.
- Punitive damages are taxable as are awards for employment discrimination and injury to reputation (libel, slander, or defamation).
- Emotional distress and mental anguish settlements are taxable unless you have undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.
You should receive a settlement statement that details the payments he received.
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