Hello - just to provide a bit of credibility to my reply, I'm a CPA with a masters degree in taxation and have been practicing for 12 years.
You are conflating two key issues - subject to tax vs subject to withholding. That rev rul and the 2015 CCA that is referenced throughout this thread specifically were meant to provide guidance to EMPLOYERS; providing clarity to them on the proper reading of "wages" and the application of withholding for FICA, FUTA and federal income tax. There never was, nor is there now, a question as to whether or not the income received by the ex-employee/taxpayer is SUBJECT TO INCOME TAX; however, there was ambiguity as to (1) how the payor should report the penalty and (2) whether or not they should be withholding employee and income related taxes from such payment. I suggest you read the rev rul and CCA again more carefully with this distinction in mind. I do agree with the suggestion someone here said when entering it into turbotax, which will properly prevent the CA wait time penalty from being subject to employment related tax; however, federal income tax will still be (properly) applied. Thanks.
