Self Employment Tax on 1099 Misc (Lawsuit Settlement)

[kshetty]

My wife and I are on full-time paid jobs. My wife received a W2 and a 1099-MISC and 1099-INT for a lawsuit settlement (for prior wages). Towards the end of State tax review, it gives an error asking for Business Code and after researching on TurboTax forums, it seems likely that the 1099-MISC details entered could be treated as Self-employment
However, the section where 1099-MISC was entered said if this is lawsuit settlement, then the system will not treat it for tax, so not sure where it is getting missed as the final paperwork is showing self-employment tax and asking for a business code

Please advise on how to fix/resolve this

[LeticiaF1]

You shouldn't need to enter a business code if the lawsuit is entered as other income on the federal return. TurboTax transfers data from your federal return to your state return. Before you begin troubleshooting your state return, go back through your federal return and make sure everything is correct.

After you review your federal return, select the State Taxes tab and review the state section. Pay close attention to the information, especially if you have made changes to your federal return. There might be new sections that need to be completed. 

To enter the settlement:

1. Go to Wages & Income
2. Scroll to the bottom under Less Common Income, select Start (or Update) for Miscellaneous Income.
3. Choose Other reportable income 
4. Answer Yes to Any Other Taxable Income
5. On the next screen enter the description and amount

Your settlement will now get reported as Other Income on your tax return. ‌Feel free to reach back if you have any other questions.  

Troubleshooting common federal to state transfer issues

If you continue to have issues, please let us know and give us more details on what state you are having issues with.   

[kshetty]

Thank you for the quick response. Just to clarify - the below is the level of detail on the lawsuit settlement

A) Gross Settlement Payment - $$$ (B + C + D)

B) 1099-INT $$$ (Amount is > 600, so reportable as per the form)

C)1099-MISC $$$ (Amount is > 600, so reportable as per the form)
D) Wages $$$

E) - Tax on Wages
F) Net Wages = D - E
Net Settlement award = F + B + C

So, as per your suggestion, should I just enter Net Settlement award in that section, OR

Do I need to enter separately -
1) 1099 INT,
2) 1099 MISC (this most likely prompted the self employment tax despite entering it as Lawsuit Settlement)
3) Net Settlement Award as "Other Reportable Income"

[PatriciaV]

Yes, enter Form 1099-INT under the Interest & Dividends topic.

Enter Form 1099-MISC under the Income from Form 1099-MISC topic. Be sure to check the box for "Lawsuit Settlement" and for "Includes back wages" then enter the net amount of wages paid with the settlement.

You do not need to report the net settlement award, as the previous entries are sufficient. The 1099-MISC Box 3 income will appear as a positive number and net wages will appear as a negative number on Form 1040 Line 8(z) - effectively reporting the "net settlement award."

[kshetty]

Thank you but this seems to take me back to the original issue where my 1099 Misc entry is not accepted because the total net settlement is higher than Misc Income

For context,
1099-INT is ~800

1099-MISC is ~800

Net Settlement (gross wag less taxes) is ~2500

I entered 1099-INT in Investments section (~800)

1099 MISC (~800) and Net Settlement award (~2.5k) in the Income from form 1099-MISC section, when I get the error message- Box 3 wage amount exceeds the Total in box 3

Even if I somehow bypass this, eventually on state tax form, it was originally picking it up as self employment tax, so unsure how to proceed/resolve this :(

[DianeW777]

It depends. If you used the advice to report the interest appropriately, the following is some details about how to enter the 1099-MISC. First it's important to answer the following questions correctly in the 1099-MISC entry as indicated by @PatriciaV and @LeticiaF1. 

• This income is not business income, rather miscellaneous as indicated by your Form 1099-MISC. It's your money making money for you and not because of a service you performed.
• It's important for you to select 'None of these apply" and then you should also select the following:
  • 'No' on the screen 'Did the '____' involve work that's like your main job?'
  • 'No' on the screen 'Did the '____'  involve an intent to earn money?'

This will report the income without any business activity and it will show up on Form 1040, Line 8 (From Schedule 1, Line 8z).

If you continue to have  the same results you can use the following instruction, then delete the 1099-MISC entry.

• If you're using TurboTax Online software and need to delete a form, click here.
• If you're using TurboTax Desktop software and need to delete a form, click here.

Other Miscellaneous Income: - See image below.

1. Sign into your TurboTax Online account
2. Go to Tax Home (left panel)  Wages and Income  section
3. Scroll to  Less Common Income > Select  Miscellaneous Income, 1099-A, 1099-C
4. Select Other reportable Income >  Yes > Enter a description (----) and the amount (use the net amount as indicated above)

If you have income tax withholding, you can enter it using the instructions below. 

Open your TurboTax Online/Mobile return > Select Tax Home (left) > Select Deductions & Credits > Review/Edit

1. Scroll to Estimates and Other Taxes Paid > Select Income Taxes Paid > Select Other Income Taxes Paid in 2024
2. Select Withholding not already entered on a W-2 or 1099 > Start > Continue to add your withholding
   • TurboTax Desktop follow these steps starting with: Select Deductions and Credits

@kshetty