My wife was fired. Filed Wrongful Termination lawsuit

[mr-bob-toms]

How do I enter it so I don't get an error?

[SweetieJean]

Was the suit settled, and did she receive a payment in 2021?

[mr-bob-toms]

Suit was settled, yes. Two payments received in 2021. First is reflected on a W2 with all appropriate withholdings. The second was reflected on a 1099-NEC with no withholdings.

[Vanessa A]

Wrongful termination income is included on your return as other income. To enter your income from a wrongful termination lawsuit click the following:

• Federal
• Income and Expenses
• Scroll down to Less Common Income and click Show More
• Start next to Miscellaneous Income
• Start next to Other Reportable Income

This will put it on line 8z of your schedule 1 as other income. 

[mr-bob-toms]

Using this entry implies it is taxable. Is this so? If it was taxable, why didn't the employer withhold all the appropriate withholdings. I was under the impression a Discrimination settlement was not taxable...? :(

[SweetieJean]

There are usually two components to damages in an employment termination claim: (1) compensation for economic losses such as back pay, and (2) compensation for emotional distress harm. Both are considered taxable “income” by the IRS.

Essentially, they are paid in lieu of wages, which would be taxable but for your wife being terminated.