Car accident- lost wages taxable?

[videot7]

I am about to settle on a car accident claim.  In this claim will be an amount of money to compensate me for work time lost going to my doctor's appointments.

In researching this, I seem to find conflicting opinions.  Most seem to indicate that I will have to pay income and self-employment taxes on the wages lost compensation.

However, I did find an IRS audit guide from 2011 at https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf On page 9,in the first paragraph, it says, "The Service has consistently held that compensatory damages, including lost wages, received on
account of a personal physical injury are excludable from gross income with the exception of
punitive damages."

in the second full paragraph, it gives an example of an accident claim which they say illustrates the usual meaning of "on account of personal injuries"  In summary, it mentions what would and would not be excludable.  Here it says, "Finally, the recovery for lost wages is also excludable as being “on account of personal injuries,” as long as the lost wages resulted from time in which the taxpayer was out of work as a result of her injuries. "

But this seems to fly in the face of everything else I've read here on the forums and elsewhere on the web.  I want to say that an IRS document supercedes everyone's opinion.  As I'm sure it does, so I guess what I am asking is:  Does this document say what I think it says, namely, that I will not owe taxes on the wages lost portion of my settlement?  Or am I taking this out of context?

I would obviously like to not have to pay taxes on this.  But what I really want is to not have any surprises come tax time next year.  I would pay estimated taxes on this, if I have to.

Thanks for any help you can give.

Videot7

[GiseleD · Accepted solution]

I checked your link, and while it is a genuine IRS publication, it is just an IRS audit technique guide, and it was written in 2011.

According to the 2019 IRS Publication 525:

"Court awards and damages. To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

1. Interest on any award.

2. Compensation for lost wages or lost profits in most cases."

Basically, you need to be taxed on these lost wages because you would have paid tax on them anyway had the accident not occurred. 

[videot7]

Thank you for taking the time to answer.  I'll be setting aside the appropriate amount of money.

[videot7]

OP here:

I have not received any paperwork (1099 or whatever would be appropriate for this kind of income) from the insurance company for the lost wages.  Assuming that I do not receive one, what does this mean?  Should I still include this income?  Or not?

Thanks again for any help with this.

Videot7

[AlanT222 · Accepted solution]

Yes, you must include your lost wages as income.  The hard part is being able to separate your settlement into different award amounts.  Most settlements are a lump sum amount that includes pain and suffering, medical expenses, and lost wages.

The only tax-free damages you can claim are the ones that compensate you for physical injury or physical sickness. 

Some elements of a settlement are taxable, including lost wages, punitive damages, and emotional distress damages.

[videot7]

Thanks for your quick response. 

Although the settlement was a lump sum, I had to supply the numbers to support various aspects of that lump sum, including time lost, medical bills, mileage, etc.  All this is documented in email, so it should be rather easy for me to determine this.

One more question:  Will Turbotax have a place for me to enter this in, or alternately, where would I report this on my taxes?  Or should I just include this income as part of my Schedule C (I am self-employed)?

Thanks again,

Fred

[DianeW777]

Yes.  TurboTax has a place to enter your car accident settlement payment (taxable portion). If the Form 1099 is received then use the first set of entry direction, if not use the second. It may come with only the taxable portion shown on the form so be sure to compare it to your records or email.

If you received a 1099-MISC:

1. Sign in to TurboTax and open or continue your return.
2. Search for 1099-misc and select the Jump to link.
3. If you're asked Did you get a 1099-MISC?, answer Yes.
   1. If you've already entered a 1099-MISC, select Add Another 1099-MISC.
4. Input the information from your 1099-MISC and select Continue.
5. On the Describe the reason for this 1099-MISC screen,
   type in lawsuit settlement and select Continue.
6. On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.

If you didn’t receive a 1099-MISC, follow these steps to report the income:

1. Sign in to TurboTax and open or continue your return.
2. Search for lawsuit settlement and select the Jump to link.
3. Answer Yes to the question Any Other Taxable Income?
   1. If you've already entered miscellaneous income, select Add Another Miscellaneous Income Item.
4. Enter a brief description and the amount you received and click Continue.

Interest earned on settlements is taxable income and should be entered as a Form 1099-INT.

[quesie63]

I'm in a similar situation.  Is the money from the insurance company considered "back wages"?  Also TurboTax takes me to schedule C and that's about business loss and it wants the name of the business, etc.  It's so confusing.  At first I didn't say it was a lawsuit settlement.  Maybe that's where it got all confusing. 

[ErnieS0]

It depends on what the insurance company paid out. As Tax Expert Alumni @AlanT222 said, “The hard part is being able to separate your settlement into different award amounts.  Most settlements are a lump sum amount that includes pain and suffering, medical expenses, and lost wages.”

Do you have some type of breakout? Perhaps a letter from your insurance company? The attorney who handled your case may be able to help. There should be a court order and/or settlement agreement. Part of the money may be for attorney’s fees.

We’d have to know more to answer your question.

@quesie63 

[quesie63]

I received compensation from my auto insurance (Progressive) for lost wages after a car accident.  It was for $1000.  I have received a Form 1099 NEC which when inputting this into Turbo tax leads me into "self employment" type questions.  This income was not for self employment.  So I don't know how to answer the questions.  Turbo tax then lead me down a path of business loss and form 8582.  I must have answered a question wrong.    Should Progressive have sent me a 1099 MISC instead of the NEC?  How do I go about claiming this "income" on my taxes??? 

[videot7]

It sounds like you were sent the wrong form.  1099MISC is probably the correct form.  Outside of contacting Progressive, I don't know how to tell you to handle it.

[SharonD007]

Taxable legal settlements are not considered self-employment income and do not need to be entered on a Schedule C. The income is reporter as Other Income.

First, delete the 1099-NEC that you entered:

1. Launch TurboTax
2. Type in 1099-NEC at the search bar at the top of the screen and select Jump to 1099-NEC
3. Delete the 1099-NEC from your settlement

Next, follow the steps below to enter your 1099-NEC so you will not be subject to self-employment taxes:

1. Click Add a 1099-NEC
2. Enter the information as shown on your form
3. Type Lost Wages on the screen that says “Describe the reason for this 1099-NEC”
4. The next screen will say “Does one of these uncommon situations apply?” Select “This was money from a lawsuit settlement” and answer the question “Was any part of the lawsuit settlement for back wages?”

 

1. Select Continue.

Please review the TurboTax Help article Where do I enter an award from a taxable legal settlement? for additional information.

[quesie63]

Thank you!  So what do I answer on the back wages question? 

[MarilynG1]

Indicate that the amount was for back wages, and enter the amount.

@quesie63 

[quesie63]

Ok.  Once I said it was for back wages it took it.