If you received a 1099-NEC for your settlement, then the settlement is taxable. A 1099-NEC is issued when you receive non-employee compensation. If your legal settlement represents tax-free proceeds, you don’t get a 1099 form. Check with the organization who issued your 1099-NEC to verify if the income reported on your 1099-NEC should not be taxable.

To report your settlement income as other income, follow the steps below.

1. Launch TurboTax
2. Search for 1099-NEC with the magnifying glass tool at the top of the page
3. Click on the Jump to 1099-NEC link at the top of the search results 
4. Click Add a 1099-NEC
5. Enter the information as shown on your form
6. Type Settlement on the screen that says “Describe the reason for this 1099-NEC”
7. The next screen will say “Does one of these uncommon situations apply?” Select “This was money from a lawsuit settlement” and answer the question “Was any part of the lawsuit settlement for back wages?”

 8.  Select Continue.

Please see the TurboTax articles Are legal settlements taxable? for more information and  Where do I enter an award from a taxable legal settlement?

Thanks for the response.  This portion of the settlement was not supposed to be taxable.  Which form should have been used for a non-taxable settlement?

thanks again.

Please make sure they did not say it would not be EARNED INCOME.

If it is Earned Income, you pay Self-Employment (FICA) tax as well as income tax. 

If it is NOT EARNED income, you still pay income tax. 

If it is non-taxable, it shouldn't be reported on any form to the IRS as income.

If you were issued a 1099-NEC for non-taxable income, you could "Not report" the 1099-NEC and explain if the IRS makes an inquiry 

OR

Enter the 1099-NEC as illustrated above (so it is not subject to Self-Employment tax) then make an entry to zero out the income. 

If you do this, be sure you are correct to claim the income is not taxable and keep the evidence to support your claim that it is not taxable with your tax file. 

Personal 

Personal Income

Less Common Income

Miscellaneous Income, 1099-A, 1099-C

Other reportable income (the last option) 

Type "Nontaxable portion of Settlement on1099-NEC" or similar description

Enter the amount AS A NEGATIVE NUMBER

The 1099-NEC and the adjustment will be on Schedule 1 

Schedule 1 flows to the 1040 line 8

Here is a link about how the IRS wants settlements reported. 

Thanks again for the message.  Last question.  How do you make another entry to zero out the income? Create another 1099-NEC for the corresponding negative income amount?

@KrisD15 provided the instructions in the post above to zero out the income.  Here are the instructions again:

1. Launch TurboTax
2. Select Personal Income
3. Select Less Common Income
4. Select Miscellaneous Income, 1099-A, 1099-C
5. Select Other reportable income (the last option) 
6. Type Nontaxable portion of Settlement on1099-NEC or similar description

Enter the amount AS A NEGATIVE NUMBER.

Thanks again for the reply on this.  Is there any preference on how to handle this?   The two options are fine with me...either not reporting the 1099-NEC or entering the 1099-NEC and using the other income to zero out.  Is either solution more favorable to the IRS?  Or which process would you execute.  Thanks again.

It depends.  If you would like to make it clear to the IRS, you should report it and then enter the negative amount (-1000, as example) that should be tax free.  This would provide a description and show that it was reported and subtracted because you believe it's not taxable.

It's not advisable to leave it off completely because you would be asked about it later or the IRS could make their own assumptions at which time you would need to communicate and/or clear the situation with them.

@TerryRN 

Hi, hope all is well.  When I go through the sequence and add the 1099-NEC for the Lawsuit Settlement...I enter that "this is money from a lawsuit settlement" and that none of this settlement is for back wages (No).  When the 1099 NEC shows up...it's saying "Missing Info!" where the 1099-NEC summaries are.  

I'm assuming this is supposed to link to Schedule 1, line 8, but the program doesn't appear to be doing that as the income isn't being recorded.  I obviously don't want this to be subject to "self employment tax" by going through the self employment process for 1099 NEC.  

I saw another message that there may be a known issue with Turbo Tax online for this 1099 NEC lawsuit income.   

Any ideas or ways to solve?'

Thanks Much.

Terry

Legal settlements are often taxable, but it depends on the type of settlement. The settlement type will be listed in your Final Settlement Agreement.

Here are the steps to enter the 1099-NEC.

1. Open TurboTax.
2. Federal > Wages & Income > "I'll choose what I work on."
3. 1099-MISC and Other Common Income > Income from Form 1099-NEC > Start/Update.
4. On the screen below, select "Yes."

  5.  Select, " Add a 1099-NEC."

   6.  Enter your 1099-NEC > Continue.

      7.  Enter the reason for the 1099-NEC > Continue.

  8.  Select "This was money from a lawsuit settlement."

  9.  Answer "If any of the lawsuit settlement was for back wages," > Continue.

Yes...I completed all of that...but it's still giving me an error message.  On the summary line it's saying it's "Missing Info!".   When I run the review, its giving me this error message.

How did you fix this 

What do you have that you are trying to enter and what type of message are you getting?  @Jc168 

I received a 1099 nec from a settlement (suddenlink/optimum I’m not self employed or own a business when I go through and answer the questions and click This was money from a lawsuit settlement. and that it wasn’t for back wages it shows missing info and that it will delete the form but nothing is missing 

See this article for instructions for entering Form 1099-NEC from a lawsuit settlement: Where do I enter an award from a taxable legal settlement?

Unfortunately, settlement proceeds for punitive damages are taxable, as are awards for employment discrimination. Lost wages are subject only to normal withholding of Federal taxes, Social Security, and Medicare.

For more info, see: IRS Settlements Brochure

That’s not the problem it’s saying I’m missing information 

Form 1099-NEC is generally intended to be used for nonemployee compensation that is earned by a contractor or other self-employed individual. If you received a payment that was reported on a Form 1099-NEC, but you didn't receive the income for work as self-employed on an ongoing basis, you can enter it in TurboTax and identify the reason for the payment:

• In Wages and Income, select Other Common Income and See More
• Select Form 1099-NEC
• Answer the questions that appear, and enter a description of the reason for the payment
• At the screen, "Does one of these uncommon situations apply?", select "This was a lawsuit settlement" if that is the best choice, or enter that it was from a one-time activity (so that it doesn't incorrectly get identified as self-employment income).
• Answer the question regarding whether any of the payment was for back wages

See this thread for another discussion of this topic.

If following these instructions doesn't resolve the issue, please provide more information as to the message you are receiving.

Yes then it said missing info but I hadn’t missed any questions 

Instead of entering the actual Form 1099-NEC, try entering just the income amount so that it is included as part of the tax return.  Keep the Form 1099-NEC in your tax records in the event that the IRS has any questions.  

Use these steps:

1. Go to the Federal > Wages & Income section
2. Scroll to the bottom to find Less Common Income 
3. Scroll to find Miscellaneous Income, 1099-A, 1099-C
4. Scroll to the bottom to find Other Reportable Income 
5. Enter a description for the income on the Form 1099-NEC and the amount of income reported

@Jc168 

I was a Class Representative in a class action lawsuit, I received an Incentive Award for being a Class Rep and a 1099-NEC for the amount paid.  I also was paid for commissions owed and that was reported on a W2. Two questions:

(1) I can't find anything in IRS publications as the whether or not an Incentive Award is taxable Income, can someone point me to IRS guidance? 

(2) I currently answered the "Do any of these uncommon situations apply" wizard, checked "money from a Lawsuit Settlement" and  "No" to it being back wages.  TT is telling me that information is missing even though I've answered all the questions.  How do I resolve this error?

@SharonD007

The incentive award is compensation and is taxable.  You're not going to find something that says it is taxable, because that's not how things work.  Basically everything is taxable, unless there is a law or a regulation that says it isn't.  The payment was for your time and efforts.  It is taxable.

I would indicate that the payment was NOT money from a lawsuit settlement.  It is compensation for being a Class Rep, not damages or punitive damages.  

I had the same problem I ended up switching to Jackson Hewitt online 

Trying this but can not enter a negative number. 

Do you have a 1099-NEC or 1099-MISC - what is it for?   You are commenting on an old and long thread, so unsure of what exactly your issue is..  @marino949-gmail- 

If it is a 1099-misc settlement not employment related, answer YES to the back wages question and enter $0 as the amount of back wages.