California wait time penalty taxable (1099 MISC)?

[rkong79]

In California, if an employer doesn't furnish last paycheck within a period of time, they are penalized through a form of payment to the former employee.  This had happened to me in 2020, and I had received a 1099-MISC for that amount.

Can anyone confirm whether this 'Other Income' is taxed as federal and state income?  I keep reading that it is not considered as wage, but Turbo Tax software collects federal and state income on this amount.

[JeffreyR77 · Accepted solution]

If you receive a 1099-MISC, it has been reported to the IRS as income and it is taxable income to you. Report it on your tax return as it was reported on the 1099-MISC.  It is not subject to self-employment and medicare taxes.  

[ryuribe]

That is not correct!  California Waiting Penalty payments are not to be taxed by the state or the IRS.

See Rev. Rul. 72- 268, 1972-1 C.B. 313, which in part holds that liquidated damages paid under the Fair Labor Standards Act (FLSA) to an employee are not wages for federal employment tax purposes. The liquidated damages paid under the FLSA are similar to the waiting time penalty in that each is designed to punish employer conduct, and each is paid in addition to the wages the employer is obligated to pay to the employee.

Payments of the waiting time penalty are not wages. The payments also do not constitute compensation for purposes of the reporting requirements under the regulations. The Internal Revenue Service has consistently interpreted the undefined term “compensation” in section 1.6041-2 to include only payment for services, rather than to include all payments from an employer to an employee whatsoever. In this case, the payments are of a punitive nature, and do not compensate the employees for their services. As the Supreme Court of California stated in Pineda v. Bank of America, N.A., 241 P.3d 870, 878 (2010), the waiting time penalty “is not designed to compensate employees for work performed. Instead, it is intended to encourage employers to pay final wages on time, and to punish employers who fail to do so.”

TurboTax needs to create a way to identify 1099-MISC payments for CA Waiting Period Penalty as non-taxable income!

[steffr]

Have you figured out how to report this without having to pay additional Federal taxes? I just spoke with a Turbo Tax person and they had no idea.

[KrisD15]

The penalty is not treated as wages, but is taxable income.

The Taxpayer who received the 1099-MISC for "CA wait time penalty" won't need to pay FICA (Social Security) tax, but does pay Federal Income Tax on the amount. 

Go to the Income section

Scroll down to "Other Common Income"

Scroll down to "Income from 1099-MISC"

Enter the 1099-MISC

Enter "CA Wait time" as Description

Select "None of these apply"

Select "No, it didn't involve work"

Select "...got it in 2021"

Select "No, it didn't involve an intent to earn money"

Although related to your job, this amount is not considered as wages or compensation for work performed. 

Source

[TashaRadford]

Very helpful.  Thank you for this post.

[pxg62]

I don't think it is taxable per this legal guidance: 

IRS Chief Counsel: CA Waiting Time Penalties Are Not Wages For years now, Section 203 of the California Labor Code has required employers to pay a penalty for willful failure to provide a departing employee with their final wages on their last day of employment (or within 72 hours for employee who suddenly quit). The amount of this penalty, often referred to as “waiting time penalty,” equals one day of pay for each day the employee is made to wait for the final paycheck, up to a limit of 30 days. There was some ambiguity and disagreement over the years regarding whether these waiting time penalties should be considered wages and subject to applicable tax withholdings. However, on May 29, 2015, the IRS Chief Counsel’s Office issued interpretative guidance (CCA [removed]) to clarify the tax treatment of such late payment penalties, concluding that they are not wages for the purposes of FICA, FUTA, or federal income tax withholding. The IRS guidance compares the late payment penalties under Section 203 to liquidated damage payments, which are awarded when an employer fails to pay its employees minimum wage or overtime compensation. These two payments are similar on two significant grounds: (1) both serve to punish the employer and (2) both are imposed by statute, instead of by the terms and conditions of the employment relationship. Unlike wages, which are awarded for the past or present services of the employee, late penalty and liquidated damage payments are not dependent on any action by the employee. Even though the late payment penalty amount is calculated based on the employee’s average daily wages, whether the penalty is owed is entirely dependent on the employer’s failure to pay the employee’s final wages. Because the late payment penalties under Section 203 have this unique purpose and are not related to the employee’s services, they do not fit within the broad definition of wages under FICA, FUTA, or the Treasury Regulations relating to federal income tax withholding. Hence, the IRS Chief Counsel concludes that employers August 2015

GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM 1

are not required to pay federal payroll taxes for such penalties. However, employers are still required to issue 1099 forms to reflect these penalty amounts, and employees must report the amount of these penalties on their federal income tax returns.

Given the IRS Chief Counsel’s ruling on this issue, it is likely that the California taxing authorities will follow suit. Indeed, the California Department of Industrial Relations has long adopted the same view as the IRS on this issue [https://www.dir.ca.gov/dlse/FAQ_WaitingTimePenalty.html].

This GT Alert was prepared by Koray Bulut and Bradley Marsh. Questions about this information can be directed to:

• >  Koray Bulut | [phone number removed] | [email address removed]

• >  Bradley Marsh | [phone number removed] | [email address removed]

• >  Or your Greenberg Traurig attorney

[Vanessa A]

From the link and info you posted.  "However, employers are still required to issue 1099 forms to reflect these penalty amounts, and employees must report the amount of these penalties on their federal income tax returns."

This is telling you it is taxable.  

It is telling employers they do not need to withhold the taxes as you are no longer their employee, but it is not removing the tax liability from the person receiving the money. 

[hguyjr24]

Hello - just to provide a bit of credibility to my reply, I'm a CPA with a masters degree in taxation and have been practicing for 12 years. 

You are conflating two key issues - subject to tax vs subject to withholding. That rev rul and the 2015 CCA that is referenced throughout this thread specifically were meant to provide guidance to EMPLOYERS; providing clarity to them on the proper reading of "wages" and the application of withholding for FICA, FUTA and federal income tax. There never was, nor is there now, a question as to whether or not the income received by the ex-employee/taxpayer is SUBJECT TO INCOME TAX; however, there was ambiguity as to (1) how the payor should report the penalty and (2) whether or not they should be withholding employee and income related taxes from such payment. I suggest you read the rev rul and CCA again more carefully with this distinction in mind. I do agree with the suggestion someone here said when entering it into turbotax, which will properly prevent the CA wait time penalty from being subject to employment related tax; however, federal income tax will still be (properly) applied. Thanks.

[hguyjr24]

Please read my post below where I clarify a very key distinction that you're reading past in the GT article. Summary - it's subject to federal income tax, just not subject to federal income tax withholding BY the payor of the penalty. That article shined light on the reading and conclusion of the 2015 CCA, which provided guidance to payors/employers on how to properly report out and withhold on (or not) payments of this type. Thanks.

[funnybunny4]

Hello, I am dealing with this now and wondering if I am able to deduct any expenses in connection with this income?

[RobertB4444]

Unfortunately, no.  This is just entered as miscellaneous income and therefore not eligible to have expenses deducted from it.

@funnybunny4 

[bbvv]

So what is the guidance here I feel like it's still up in the air about the different tax circumstances as the ex-employee. I know you mentioned that the info presented above is for the employer. Any new updates on how to approach this 1099-misc for net final pay waiting?

[BillM223]

Most of the comments above were for the ex-employee, not the employer. The ex-employee needs to report the 1099-MISC as taxable income. The ex-employer just does not need to do withholding on the amount on the 1099-MISC.

I don't see any updates as to how these items should be treated.

[bbvv]

Got it I understand now. I appreciate the work you all do since this backwards country is too lazy to do this all automatically. That $$ the lobbyists provide is holding this country back from freeing all its citizens from these unnecessary headaches 😉