1099-NEC for a personal injury

[luigit]

I received a 1099-NEC from the City for an injury compensation after a sidewalk fall. How do I enter the information? This has obviously nothing to do with a business income.

[MonikaK1]

Form 1099-NEC is generally intended to be used for nonemployee compensation that is earned by a contractor or other self-employed individual, but you can enter it in TurboTax and identify the reason for the payment.

You can enter the 1099-NEC this way if it was not received for self-employment:

1. Wages & Income
2. Other Common Income
3. Select Income from a 1099-NEC
4. Enter the payer's name
5. EIN Number
6. Amount you received
7. Describe the reason for this 1099-NEC = State what it was for
8. Does one of these uncommon situations apply?
9. Click This is not money earned as an employee or self-employed individual

Enter "settlement" as the reason for the 1099-NEC.

If you received one form from the city and another form from an attorney for the same incident and dollar amount, you only report the income once. See this thread for another discussion of this topic.

See this IRS analysis regarding the taxability of settlements and judgments.

Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries. Within these two groups, the claims usually fall into three categories:

1. Actual damages resulting from physical or non-physical injury;
2. Emotional distress damages arising from the actual physical or non-physical injury; and
3. Punitive damages

The Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages.

Contact the payer if you didn't receive a breakdown of the nature of the payment received, to determine the amount of the payment that represented taxable punitive damages rather than compensatory damages, such as for medical expenses. 

Compensatory damages paid on account of personal physical injuries or physical sickness are not taxable. If all or part of the payment was nontaxable compensatory damages paid on account of your personal physical injury, then enter another Form 1099-NEC (as if you'd received a second form) with a negative number for the amount of the payment that was nontaxable.

 [Edited 02/27/23| 5:36pm PST] 

 @luigit (edited) 

[luigit]

Hello,

thanks for taking the time to reply to my question,

I have followed your instruction and when I click "done" it says:

Looks like we're missing some info

One of your 1099-NEC forms doesn't include enough info for us to know where to report the income on your return. We raccomand you go Back and edit the following form, answering all the questions so we can link it to the right activity

San Rafael City of                     8,000.00

If you don't provide the missing info we'll remove incomplete form from your return.

I'm confused on what to do...

thank you!

[PattiF]

[Edited 02/27/23|6:52 PM]

[luigit]

Please look at the other 'Tax Expert" reply to my initial post. Instructions are totally different. It makes more sense as a settlement. 

[PattiF]

See this IRS analysis regarding the taxability of settlements and judgments.

Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries. Within these two groups, the claims usually fall into three categories:

1. Actual damages resulting from physical or non-physical injury;
2. Emotional distress damages arising from the actual physical or non-physical injury; and
3. Punitive damages

The Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages.

Contact the payer if you didn't receive a breakdown of the nature of the payment received, to determine the amount of the payment that represented taxable punitive damages rather than compensatory damages, such as for medical expenses. 

Compensatory damages paid on account of personal physical injuries or physical sickness are not taxable, as pointed out by Opus 17 below.

[Edited 02/27/23|6:51 PM PST]

[Opus 17]

Income received for a personal injury settlement is not taxable at all.

Settlements for physical injury are not taxable.  Settlements for lost wages are taxable as if they were wages paid by an employer.  Amounts paid for pain and suffering are not taxable if the pain was due to a physical injury, but are taxable if the pain and suffering was due to a non-physical injury.  If the settlement includes interest due to late payment, the interest is taxable even if the majority of the settlement is for a non-taxable injury.

I would start first by contacting the legal office that issued the settlement and asking them to cancel the 1099-NEC and issue no replacement, or change it to a 1099-MISC.  It's much easier to zero out the income if it was issued on a 1099-MISC.

If they won't cancel the 1099-NEC, you have three options.

1.  Don't include it as income.  File by mail, and attach a copy of the 1099 and a written explanation of why it is not taxable.  Don't include details or doctors' reports, but keep such documents handy in case of audit.

2. Use a different software company or a tax professional.  Some tax software will allow you to attach PDF documents to your tax return, Turbotax has decided not to do this.  Attach the 1099 and a written explanation as PDFs and then e-file.

3. Enter the 1099 as income, then enter a negative amount of income to zero it out.  This is somewhat clumsy, and if not done correctly, will cause you to have to upgrade to the most expensive self-employed version of Turbotax when you shouldn't need it.

I'm not well versed in how to make the program accept your income and then zero it out, maybe the experts can help.  But this is not taxable income, unless a portion of the payment is for something other than physical injury.

@Critter-3  can you advise how to enter and zero out a 1099-NEC?

[Critter-3 · Accepted solution]

Follow these directions to post the incorrect 1099 : 

• Down the left side of the screen, click Federal.
• In the center of the screen, click Income & expenses.
• On the screen Your income and expenses, scroll all the way down to the last section, Less Common Income.
• Click the Start or Update button for the last topic, Miscellaneous Income, 1099-A, 1099-C.
• On the next screen, Let's Work on Any Miscellaneous Income, scroll down and click the Start or Update button for the last topic, Other reportable income.
• The next screen asks, Did you receive any other taxable income. Click Yes.
• On the next screen, Other Reportable Income, enter a description and the amount. Click Continue.
• On the next screen click Done.

The income will be reported on Schedule 1 line 8Z with the description that you entered. 

THEN repeat the same steps AGAIN and this time enter the income as a Negative amount ... the discription to use is "reversing 1099 income reported in error".   This will put the income on and then off the return to make both you and the IRS happy.  

[MonikaK1]

See this IRS analysis regarding the taxability of settlements and judgments.

Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries. Within these two groups, the claims usually fall into three categories:

1. Actual damages resulting from physical or non-physical injury;
2. Emotional distress damages arising from the actual physical or non-physical injury; and
3. Punitive damages

The Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages.

Contact the payer if you didn't receive a breakdown of the nature of the payment received, to determine the amount of the payment that represented taxable punitive damages rather than compensatory damages, such as for medical expenses. 

Compensatory damages paid on account of personal physical injuries or physical sickness are not taxable, as pointed out by Opus 17 above.

@luigit