Received a W2 and 1099-Misc for a settlement?

[Twomonsters]

Hey guys so I'm a bit confused. So my wife got a settlement from a class action lawsuit in 2020. All of the settlement was taxed. We received a W2 for the settlement that shows the taxes deducted. We also received a 1099-MISC for the same amount minus a penny. When I input the MISC form into turbo tax it takes a chunk of my refund away. It feels like I would be getting taxed twice on this amount. Any help would be great!! 

[ToddL99]

If the Form W-2 and the Form 1099-MISC both reported the same payments, then you will have to make an adjusting entry to prevent double-counting the income.

First, enter the W-2 in the Wages and Salaries interview of Federal Taxes > Wages and Income (or Personal Income). Enter it exactly as it was sent to you to ensure you get credit for the taxes withheld.

Then, enter the Form 1099-MISC in the Income from 1099-MISC interview in Wages and Income > Other Common Income.

Do NOT say the income was related to your work or career, that it involved an intent to make money or that it had been received in the past or expected in the future. Answering "Yes" to any of these questions will trigger self-employment taxes.

Finally, go to the  Other Reportable Income interview, the very last interview in Wages and Income  (Federal Taxes   >  Wages & Income >  Less Common Income  >  Miscellaneous Income ). (Or enter "other reportable income" in the Search Box and select "jump to other reportable income"). These payments are NOT wages).

 Enter the amount reported on the 1099-MISC as a negative number. This will cancel out the earlier 1099-MISC entry.

[Twomonsters]

So I ended up deleting the return and starting over. So you are saying that I don't need to put in the MISC form into my return? I think that's what I get from you post, thanks for the help.

[JohnB5677]

That is incorrect.  You initially have to enter the 1099-MISC as income.  That form is reported to the IRS and they will be looking for it to be posted.  Todd gave you excellent directions on how to negative it out to become a net zero income.

[atels]

Hi, similar situation - a little confused. Received equal amounts as back pay and as part of the settlement. They are showing as other income on the 1099-MISC and W2 correctly. Should I check yes or no when it asks" Was any part of the lawsuit settlement for back wages?" Your prior answer makes it sounds like no....

[JeffreyR77]

If your settlement included back pay, your answer should be yes. 

The W2 reported amounts are the back pay portion and include the appropriate amount of tax withholding. 

The 1099-MISC reported amount is the amount attributable to the attorney fees amounts and other settlement fees. These should not be arbitrarily subtracted out - they do not represent the same settlement as the W2 amounts even if the dollar amounts may be the same. 

You may have some deductible expenses to offset these settlement fees, but in general your attorney fees are not deductible expenses on Schedule C. 

They may be deductible as Itemized Deductions on Schedule A.  

How Do I Report Legal Fees From Form 1099-MISC

[atels]

Thanks, one follow up - the settlement will be taxed?

[DianeW777]

Yes, it will be taxed.  One thing I want to clear up about the legal fees as well.  After 2017, with the enactment of the Tax Cuts and Jobs Act (TCJA), there are not miscellaneous deductions available in the category for legal fees.  There will be no deduction for those fees for 2020.

@JeffreyR77 is providing the correct information about the Form 1099-MISC income. "The 1099-MISC reported amount is the amount attributable to the attorney fees amounts and other settlement fees. These should not be arbitrarily subtracted out - they do not represent the same settlement as the W-2 amounts even if the dollar amounts may be the same."   (The link is referring to another tax year.)

[itsmy99]

Hi, please help; I also received a settlement from ex-employer. Two checks came since they allocated equal amounts to a W-2, and a 1099-MISC specifying that it was Non-Wages portion of the settlement.

In entering the 1099-MISC, if I checked YES to "Was any part of the lawsuit settlement for back wages?" and entered the dollar amount, TurboTax would not calculate a Self-employment tax. If I checked NO to the question I would see a Self-employment tax added on.

My question is that, yes, the 1099-MISC should be taxed as income, but should I have to pay self-employment tax in addition? What would be the IRS-accepted answer to the TurboTax question "Was any part of the lawsuit settlement for back wages?" Thank you so much for taking the time to read and reply.

[DawnC]

In your case, you should answer NO.   Since you received the W-2, you will enter that and that will satisfy the wage portion of the settlement.    The non-wage portion of the settlement should not have self-employment (payroll tax) tax applied to it so you should not indicate that the 1099 settlement was for back wages.    TurboTax will apply ordinary income tax to that amount but not any self-employment/payroll tax.    @itsmy99

[itsmy99]

Thank you for your valued time DawnC. The curious thing is that the NO answer, while correctly reflecting that the 1099 amount is non-wages, will trigger self-employment tax calculation. The YES answer won't, as per the current TurboTax program. Please help. 

[RobertB4444]

@itsmy99  You do not owe self-employment tax on the 1099 amount.  Please answer the question so that you don't pay any self-employment tax.

[itsmy99]

Thank you for your tax expertise Robert4444. I knew there must have been some distinction, tax-wise, to the settlement allocation of half wages, half non-wages. So, the IRS does tax the non-wages portion as income, but not as self-employed earnings then. If I am incorrect, please let me know. Thanks again

[itsmy99]

Hi @DawnC  and @RobertB4444 , just yesterday TurboTax program calculated Self-Employment tax only when I answered YES to the question. Now, something has happened. TurboTax does the SE schedule no matter what answer I give. The Self Employment Tax form enters the dollar amount as a Sched C and other earnings, which triggers the SE tax. How do I file so I don't have to pay the Self Employment Tax? I have never seen TurboTax behaves differently from one day to the next like this. Please let me know what I can do to fix it. Thank you.

[RobertB4444]

@itsmy99  Correct.  It should have been reported on your W2 but not had social security or Medicare taxes paid on it.