In an employment lawsuit settlement, do you report legal fees paid directly to lawyers from the defendant?

Forum|Forum|1 year ago
February 28, 2025
2 replies
21 views

For a wrongful termination settlement, I received a W-2 for back wages (already taxed), and a 1099-MISC for emotional damages (for which I will report as income). My lawyers worked on contingency, so the company paid them another sum directly. My lawyers received a 1099-NEC, but I haven't received anything. Do I report the legal fees on my taxes? And if so, where?

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KrisD15

Level 15

No, you can double check with the attorney, but it sounds like the defendant was ordered to pay legal fees, so you are not liable to claim the fees the attorney received as income.

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Opus 17

Level 15

In general, legal fees for unlawful discrimination are still tax deductible, and they are a special "above the line" deduction you can take even if you don't itemize. Normally, I would expect you to be taxed as if you received the entire settlement, and then paid the attorneys yourself, then you would deduct the legal fees. So I think the payer is probably wrong to issue separate 1099s.

However, because they did that, I would only report the W-2 and 1099s you got as income, and not deduct any legal fees. They made it easier for you, although it may not be technically correct.