1099-NEC for legal settlement -- keep getting "missing info" (2023 taxes)

[redpixel]

I was issued a 1099-NEC for a legal settlement. This is for the portion paid to me, not the portion paid to my lawyer. I have selected the radio button for "lawsuit settlement". (It's not back wages, so "no" there.) I keep getting the "Looks like we're missing some info" screen. If I click the "Continue" button at this point, it will entirely delete the 1099-NEC info.

Because I've been through this a few times now, I know that it's trying to create a Schedule C for me, but I don't have a business, so I don't have a business code.

How do I proceed?

[DavidD66]

You cannot report a Form 1099-NEC without filing a Schedule C.  Form 1099-NEC is for Non-Employee Compensation, which must be reported on Schedule C.  The problem is if you report the proceeds from your legal settlement on Schedule C, it will be subject to self-employment tax.  Your payment should have been reported on Form 1099-MISC.  I suggest you report the proceeds on Schedule C, but add an expense to Schedule for the same amount as the payment.  This will zero out your Schedule C and result in no self-employment tax being owed.  You still need to report the settlement as income.  To do so:

1. Sign in to TurboTax and open or continue your return.
2. Search for lawsuit settlement and select the Jump to link.
3. Answer Yes to the question Any Other Taxable Income?
   • If you've already entered miscellaneous income, select Add Another Miscellaneous Income Item.
4. Enter a brief description and the amount you received and select Continue.

[redpixel]

I appreciate your help! But it's not correct that 1099-NEC requires Schedule C, since I have another 1099-NEC for different circumstances that does not trigger the Schedule C in TurboTax. Granted, this is assuming that things are implemented correctly in TurboTax, and the curious thing is that this situation (legal settlement reported on 1099-NEC) has been causing TurboTax users trouble for at least the past several years. The TurboTax help pages say in multiple places that a legal settlement does not require Schedule C, and yet, TurboTax is triggering it.

My question is: How do I get TurboTax to not trigger the Schedule C for this income? I have clicked the radio button to indicate that it's proceeds from a legal settlement, but that button does not seem to work to plan.

I agree that if my former employer had used 1099-MISC instead, I wouldn't be wrestling with this. But apparently the employer has some leeway as to which form to use.

[DianeW777]

It depends.  As indicated by @DavidD66, the form itself, 1099-NEC, indicates self employment, not only to an expert, but the IRS as well.  

The instructions for entering a legal settlement are shown in the link below and you will notice it refers only to 1099-MISC.  Check with your attorney to inquire about why it was reported it on this form vs Form 1099-MISC.  

Our indicator is that it may be back wages which would require social security and medicare taxes to be paid.  You can certainly enter it as legal settlement as long as you have the knowledge provided.

Enter your legal settlement by following the steps in the article below.

• Where do I enter the award for a taxable legal settlement?
• Are legal settlements taxable?
• What is Form 1099-NEC?

@redpixel 

[redpixel]

I think I am being misunderstood.

I have followed the instructions to check the radio button that "This was money from a lawsuit settlement." I have checked the radio button that NO, this was not for back wages. I have this knowledge. TurboTax is not acknowledging the selections I've made.

I see that I can enter this as "Other Taxable Income", as if I had not received the 1099-NEC, and perhaps that is the best path. But it would be better if the software worked correctly.

[Colosteve1]

I had the same issue and finally just went to forms view and clicked on the 1099-HEC and selected the "Other Income" box and it resolved everything 🙂

[traveler12]

I ran into the same problem. Entered a 1099-NEC received from a lawsuit settlement, answered the questions a about the lawsuit and not being wage-related, but TurboTax insisted on creating a Schedule C and demanding a business category. No way to exit the loop, and TurboTax refused to continue.

But your directions do NOT address the original question (that I’m reposting now). Your directions are wrong, and TurboTax’s published help articles are also wrong.

I went back to the source, IRS “Instructions for Forms 1099-MISC and 1099-NEC (Rev. January 2024).” Had to dig for this one. The 1099-NEC instructions (from the IRS) on page 10 state this very clearly:

“Generally, amounts paid to individuals that are reportable in box 1 are subject to self-employment tax. If payments to individuals are not subject to this tax, report the payments in box 3 of Form 1099-MISC.”

The defendant in my case used the wrong IRS form. 1099-NEC is for workers, only. Any entry in box 1 will trigger self-employment tax, hence the required Schedule C to support it.

The correct answer to this problem (to get around TurboTax’s bug that should have bounced the 1099-NEC entry process) is to either enter the lawsuit proceeds as misc income (with no payer details), or to instead enter it as a “1099-MISC” (settlement amount in box 3, rather than box 1) and retain the original paperwork to use in a later audit, if needed.

This TurboTax bug also calculates the tax due incorrectly. Since the software silently does not accept the value we enter as the taxable settlement amount, even when we answer the rest of the questions correctly. I was ready to file an extension with the dollar amount shown as a tax payment. Good thing I didn’t. Using the work-around I described above caused my tax due amount to increase enough to add another decimal point. That’s a significant error, with penalty and interest added.

This problem with TurboTax failing to direct customers to the correct process for entering taxable lawsuit settlements with this software goes back several years. Inexcusable.

[BarryK123]

This problem/bug still exists for 2024.  I just tried to enter a 1099-NEC for a lawsuit settlement (not back wages) and am getting an error saying there is info missing.

Time to fix this, Turbotax!

[JamesG1]

A lawsuit settlement that does not include payment for back wages should be reported as other income.

Follow the steps below to report the IRS form 1099-NEC as other income.

• Select Federal from the left side menu.
• Click on Wages & Income.
• Scroll down to Less Common Income.  Click the down arrow to the right.
• Click Start / Revisit to the right of Miscellaneous income….
• Click Start / Revisit to the right of Other reportable income.
• At the screen Other Taxable Income enter a description. 

The entry will be reported:

• on line 8z of Schedule 1 of the Federal 1040 tax return, and 
• on line 8 of the Federal 1040 tax return.

View the entries at Tax Tools / Print Center / Print, save or preview this year's return / Include government and TurboTax worksheets.

[Marlasil]

The settlement is a reimbursement for expenses to correct an issue.  I understand putting this under 1099 misc instead of 1099 NEC, but it's not asking me for the costs involved with the lawsuit which comes out to more than I was reimbursed for.  How do I do this?

[BarryK123]

Marla,

Unless the legal settlement is business-realted, the legal fees aren't deductible.

[MonikaK1]

The only legal fees related to a lawsuit settlement that may be deducted under current law are those related to employment discrimination cases where you are the plaintiff, whistleblower reward cases, and legal fees related to a business reported on Schedule C or Schedule E.

Please see this TurboTax tips article for more information regarding attorney fees.

Please see IRS Publication 529 for more information on miscellaneous deductions and the changes to the law.

@Marlasil 

[Marlasil]

We went to meditation against my builder who did the job wrong.  I had to fight to be either reimbursed for what I  already paid to have it done correctly, because they wouldn't refund the money without getting a lawyer involved, or the other option I have them was for them to pay someone to do it correctly.  They agreed to the former, because it meant that they would be released from their warranty.  I didn't ask for pain and suffering for the year and a half we had subpar bathrooms, along with other issues ie cracked ceiling, excessive creaking leading to insomnia, etc. This was a brand new house.  I had to go to mediation just to get a refund.  My attorney wrote a letter stating this, as per what the IRS office said to do if the builder ended up giving me a 1099.  However there is no place to put it, or the receipts for the actual work done. 2 separate specialists at Turbo Tax concluded that I should have never received a 1099 and that I should file a fraud claim with the IRS.   

[PatriciaV]

If you have documentation that a portion of the income on Form 1099-NEC should not be taxable, you can enter an adjustment that will appear on Schedule 1 Line 8. Be prepared to provide this documentation to the IRS if you hear from them.

Follow these instructions to enter the adjustment:

1. Go to the Income and Expenses section of TurboTax
2. Choose Less Common Income
3. Choose Miscellaneous Income, 1099-A, 1099-C
4. Choose Other reportable Income
5. Enter a description and the amount (as a negative number) of your excluded income

@Marlasil