I'm in settlement discussions with my former employer, and am wondering which is more advantageous, 1099 or w2?

[Chandra]

My claims are both backpay and emotional distress, so both/either could be applicable (the settlement number is lower than both individual claims, so I'm wondering if I can have the settlement terms dictate the classification). 

If so, should I push for one over the other? I'm otherwise a w2 employee. I've read that you can be taxed at 15% for the 1099 in addition to your normal tax bracket (in my case 25%), so a total of 40%. As such, would a W2 be best?

[Critter]

You don't have a  decision to make ... the employer will make that choice per the IRS regulations on this matter.

[Chandra]

Thanks for your response! I understand that, but if they pay for the backpay, it will be classified as w2, if emotional distress, as a 1099....do you know the tax implications for a 1099 Misc for an otherwise w2 employee? Would it equal 40%?

[TaxGuyBill · Accepted solution]

The portion of your settlement for lost wages is subject to income tax (25% in your case) and 7.65% for Social Security/Medicare taxes.

The portion of your settlement for emotional distress (assuming the emotional distress is not based on physical injury) is subject to income tax (25%), but not the 7.65% Social Security/Medicare taxes.  Even though it is on a 1099, that is NOT subject to the 15.3% Self Employment tax (it should not be reported in box 7 of the 1099).

In the event the settlement is for unlawful discrimination, the attorney fees may be an 'above the line' deduction (which is good).

[Chandra]

Thank you!!! The settlement will likely be a combination of both, but it's great to know that I won't be subjected to the Self Employment tax