That is not correct! California Waiting Penalty payments are not to be taxed by the state or the IRS.
See Rev. Rul. 72- 268, 1972-1 C.B. 313, which in part holds that liquidated damages paid under the Fair Labor Standards Act (FLSA) to an employee are not wages for federal employment tax purposes. The liquidated damages paid under the FLSA are similar to the waiting time penalty in that each is designed to punish employer conduct, and each is paid in addition to the wages the employer is obligated to pay to the employee.
Payments of the waiting time penalty are not wages. The payments also do not constitute compensation for purposes of the reporting requirements under the regulations. The Internal Revenue Service has consistently interpreted the undefined term “compensation” in section 1.6041-2 to include only payment for services, rather than to include all payments from an employer to an employee whatsoever. In this case, the payments are of a punitive nature, and do not compensate the employees for their services. As the Supreme Court of California stated in Pineda v. Bank of America, N.A., 241 P.3d 870, 878 (2010), the waiting time penalty “is not designed to compensate employees for work performed. Instead, it is intended to encourage employers to pay final wages on time, and to punish employers who fail to do so.”
TurboTax needs to create a way to identify 1099-MISC payments for CA Waiting Period Penalty as non-taxable income!
