Bug? 1099-NEC Income Lawsuit/Back Wages Income Not in Total Income

[motifone71]

Hi All,

I received a 1099-NEC for independent contractor backpay awarded from a liquidating trust that handled the company's bankruptcy and closer. 

1. First, would this be considered "money from a lawsuit settlement" and "back wages".  I was a 1099 contractor, not a W-2 employee, so wasn't sure by the term Wages.

2. Second, in Personal Income > Other Common Income > Income from Form 1099-NEC, I enter the 1099-NEC I received, and choose "This money was from a lawsuit settlement" and choose Yes for "Was any part of the lawsuit settlement for back wages?"   For the back wages amount, I enter the full total of the 1099-NEC I received.  After entering this though, the amount is not included on Form 1040 Total Income,  but I believe the amount should be taxed.  Is this a bug?  If I enter the amount as a 1099-MISC, the income is added to my Total Income just fine.   Any thoughts are appreciated!

[RayW7]

I think the real question is....is this an award or is this actual wages for your job. 

The federal tax code excludes from taxes a lawsuit award arising from physical injury or illness claims. The IRS doesn't collect tax on an award that compensates the plaintiff for medical expenses, lost wages, pain and suffering, and emotional distress suffered because of the physical injury or illness.

If the compensation was actually for work performed and not an award then it would be taxable and you would answer no to 'Was any part of the lawsuit settlement for back wages'.  

Then the amount will show up as other income and taxable.

Check your 1040 in the forms mode to see if the income was added as 'Other Income'.  It will be taxable income if entered here. 

Other income is reported on line 8 of Schedule 1 of the 2020 Form 1040, then the total from line 9 of Schedule 1 is transferred to line 8 of the 1040 itself.

[motifone71]

Hi,

Thanks for the reply.  Yes, the entirety of the 1099-NEC is for independent contractor work I invoiced years ago, but then the company went bankrupt.   The liquidating trust finally completed the process and I was sent the exact amount I invoiced years ago.

I did try your approach of answering No to "Was any part of the lawsuit settlement for back wages", which leads to another issue reported on these boards, where TurboTax reports it is "Missing Info" it needs in order to know where to report the income on the return.

So instead, what I have done is on the earlier step of inputting the 1099-NEC, where it asks "Does one of these uncommon situations apply?", I choose "None of these apply to me" instead of "This was money from a lawsuit settlement".  Then, I am given the option to Add a New Business, and can link the income to the business, when then shows the income in my Total Income.

[drroyann]

I have a 1099-NEC  as a result of a class action law suit but turbo tax isn't accepting it

[drroyann]

1099NEC  from class action lawsuit for  when I was an employee  how do you file?

[MaryM428]

Here is how to report a 1099-NEC from a class-action lawsuit

• Federal
• Wages and Income
• Income from 1099-NEC
• Answer the question about who received the 1099-NEC and who paid you
• Fill in the amount from Box 1
• Describe the reason for this 1099-NEC as Class Action Lawsuit
• Does one of these uncommon situations apply? - Select This was money from a lawsuit settlement
• Answer the question about back wages and fill in amount that was for back wages if any

Are Legal Settlements Taxable?


@drroyann