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!!
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.
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.
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.
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....
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
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.)
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.
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
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.
@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.
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
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.
@itsmy99 Correct. It should have been reported on your W2 but not had social security or Medicare taxes paid on it.
Hi @RobertB4444, I read that the IRS recognizes that not all 1099-MISC are earning income subjected to SE tax. The survey questions that TurboTax provides after a 1099-MISC entry should direct the tax software to prepare or not prepare a SE schedule. Which it was doing yesterday for me. But now the SE schedule seems to have stuck as an automatic response to my 1099-MISC. If the IRS allows zero self-employment tax on the Non-Wages portion of a settlement, help me with the steps to tell TurboTax software to delete the SE schedule. Thank you so much.
@itsmy99 Delete the schedule C that you created and then you can just enter this as 'Other income.'
To Delete a form:
Tax forms are interconnected. While you are on this screen don’t start deleting forms you don’t recognize.
No schedule C was created for me. However, a schedule SE was created and stuck there. Should I delete it?
My Tools drop down menu doesn't have a Delete a Form option. Where would I go to do that?
The software is a TurboTax Premier 2021 that I am using this year.
From the Tools drop down, choose Tax Tools, then Delete a Form. I tested this in TurboTax and realized that if you change your answer to NO after you already entered yes, TurboTax doesn't update the change on your tax return. There is no self-employment tax when you answer NO. Since changing your answer to NO is not working correctly, leave your answer YES, but enter 0 for the amount of back wages. This will put all of the 1099-MISC income on Line 8 of Form 1040. Or you may want to delete it completely and reenter it from scratch. For me, entering zero as the amount of back wages worked as I expected it to.
I believe what you may be seeing with your tax bill when entering this, is when you answer YES, TurboTax is correctly moving the back-wage portion to Line 1 - Wages and this is increasing your Earned Income Credit by more than the ordinary tax generated by answering NO. But none of the 1099-inc should be reported as wages - you got a W-2 for that. If misreporting the income as wages increases your Earned Income Credit and therefore your refund, the IRS might deny your credit and disqualify you from claiming the credit in the future. So, if you qualify for EIC, make sure you are not overstating your wages. Your EIC credit is on Line 27a. See Over or Underreporting Your Income or Expenses.
The W-2 amount should be on Line 1 of your tax return, and the 1099-MISC amount should be on Line 8 - Other income. You can verify there is no self-employment tax on your return by checking Line 23 of Form 1040. Any SE tax is included there - and you can see the breakdown of those taxes on Schedule 2. SE tax is Line 4. You may have something else on your return generating the SE tax, but it does not appear to be coming from the 1099-Misc entry. @itsmy99
Thanks so much @DawnC and @RobertB4444. My 1040 had been completed, looked correct, and accepted by the IRS! Even though my settlement was not large, your time and help were invaluable.
I have a question. Will the income be considered as earned income? I didn't work in 2022 at all and I have 3 qualifying children. Will this settlement income allow me to qualify for the tax credits?
It depends. If the settlement was paid by your former employer for wrongful discharge, lost wages, business income and benefits, it is considered earned income. Generally, any other type of settlement will not be considered as earned income. See Tax Implications of Settlements and Judgments for more information.
If the settlement is earned income, you may qualify for the earned income tax credit if you fall within the income threshold. See Earned Income and Earned Income Tax Credit (EITC) Tables for more information.
Hi @ToddL99 ,
what do I put in the "description box" before you add a negative number that cancels the 1099-misc entry?