The penalty is not treated as wages, but is taxable income.
The Taxpayer who received the 1099-MISC for "CA wait time penalty" won't need to pay FICA (Social Security) tax, but does pay Federal Income Tax on the amount.
Go to the Income section
Scroll down to "Other Common Income"
Scroll down to "Income from 1099-MISC"
Enter the 1099-MISC
Enter "CA Wait time" as Description
Select "None of these apply"
Select "No, it didn't involve work"
Select "...got it in 2021"
Select "No, it didn't involve an intent to earn money"
Although related to your job, this amount is not considered as wages or compensation for work performed.
Source
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