Marital Status and Taxes on Lawsuit Settlement

[goode-bill-p]

Hello, I'm trying to plan my taxes for 2019 but have hit a snag with some unfamiliar territory. Any assistance is appreciated.

My wife is receiving a settlement for back-pay and damages from a former employer. My understanding is that the employer is responsible for making federal, state, and FICA deductions from the back-pay portion of the settlement. We were not married when she worked for this company. As such:

1. Will the withholding be at a single or married rate? I figure this likely has to do with what the company has on file, but I'm asking to cover my bases.
2. When doing our taxes, is the back-pay taxed at our current, married, rate, or is is taxed at a single rate since that's what she was at the time?
3. Does the employer have to deduct federal and state taxes from the damages portion as well, or are we responsible for figuring that part out?

Thank you very much!

[JulieR · Accepted solution]

Your wife's back-pay withholding will be calculated based on the W-4 the employer has on file.  If your wife wants to change her withholdings, she should submit a new W-4.

The tax will be calculated at the rate applicable to the tax year it is received, based on your current filing status.

Damages for personal injury, interest, penalties, and legal fees included with back-pay awards are not taxable as wages and are generally reported on Form 1099-Misc.

[goode-bill-p]

Very helpful. Thanks a lot!