How should withholding be calculated on a settlement check for lost wages?

[packersrodgers]

I am to receive 2 checks in a discrimination settlement case.  One is for pain and suffering. No tax will be deducted and the check will be supported by form 1099..  I say the second check for lost wages should be treated like a Norman payroll check and taxes withheld accordingly.  Employer says they must take a percentage which results in a deduction $5287.68 more than a normal payroll deduction.  What is correct?

[PatriciaV · Accepted solution]

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

[KPChin]

I was assessed Self Employment taxes on a settlement for Defamation.  Why is this considered income subject to the SE tax?  Why did Turbo Tax not point that out when I filed?

[Critter]

There are several places to enter a 1099-misc and the program leans hevily to putting it on a Sch C but to get it to the line 21 of the 1040 required you to read the screen options carefully and answer them correctly ...you can amend the return to complete that section again.