I received money from a lawsuit settlement. Turbotax will not let me file taxes without information in the schedule c? I am not self employed. How do I get around this?

[retzmacher_51]

I already spoke with a representative Friday evening that tried a few different troubleshooting options to see if I could file taxes but none of it worked.

I spoke with a representative Saturday morning that thought I may have to file a schedule c and went through information in the self employed section which seemed incorrect.

I now have my question posted here hoping to get an answer as to why I need a schedule c or what information needs to be in a schedule c.  On the 1099-MISC, box 3 and 10 (Box 10 - Gross proceeds paid to an attorney) are filled out.  Since box 10 has information, Turbotax wants/needs information for a schedule c.  Is this supposed to be the attorney who handled the legal case?  That is the only thing I can think of as far as self employment.

[ColeenD3]

What type of tax settlement? Was it for past wages?

In general, to enter other income, follow the steps below, but be careful that this is not subject to SE tax.

You can add it as other income

• Wages & Income
• I'll choose what I work on
• Less Common Income select Start (or Update) for 
• Miscellaneous Income.
• Other reportable income and you can enter your own description(s) and amount(s).

[retzmacher_51]

It was from incorrect/improper pay through a certain date range

[retzmacher_51]

I have a 1099-MISC form for it and it has information in box 3 and box 10.

Right now I am in the 'Other taxable income' section (which is right after reportable income) and there is a specific note that says "Do not enter income reported on Form 1099-MISC"

I first tried reporting it in
-Other Common Income
-1099-MISC
Recording the information in box 3 and box 10 appropriately but because there is information in box 10 it wants a schedule c.

Someone else I spoke with today told me I may need to file a schedule c and went through the self employed 1099-MISC with me.  I am not a tax professional but that didn't seem correct.  

The only options that seem correct are either using 
-Other Common Income 
OR
-Less Common Income as suggested above

However, in Less Common Income it specifically says not to use something on a 1099-MISC.  I just don't understand why it's asking for a schedule c for box 10 on the 1099-MISC when I am not self employed under the 'Other Common Income' section. 

[ToddL99]

If the 1099-MISC reports income that is not related to your main job or self-employment, enter the information as follows in the 1099-MISC interview:  

• Enter the 1099-Misc in the Other Common Income  section (Enter "1099 misc" in the Search Box and Select "Jump to 1099 misc form")  

• For "Description", enter "Tax settlement"  

• Also check that it does  not  involve work like your main job, that it  did  not  involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income).  

• The income will be reported on line 8 of Form 1040 of your return (Other income from Schedule 1, Line 9).  

Answering the questions in this way will not generate a Schedule C or an employment tax liability for the payment.

[retzmacher_51]

ToddL99 it involves incorrect/improper wages for my current job and employer.  The software is hung up on a loop in box 10 for attorney fees.  My 1099-MISC has an amount in box 10 and because there is an amount there it's saying there needs to be information for a schedule c.  I am now wondering if this is supposed to be the attorney's information that handled the case?

[ToddL99 · Accepted solution]

It would certainly appear that this 1099-MISC is reporting payments made to the attorney who handled your case. Check the Payer's FEIN and Recipient's FEIN/SSN to see if this form was sent to you in error.

If the payment was reported as being made to you, then contact the Payer for an explanation and issuance of a corrected 1099-MISC with "0" in Box 10.

Unless you are an attorney, you should not have received a 1099-MISC showing payments for attorney's fees. The only exception would be if the 1099-MISC was issued on your behalf (you would be listed as Payer) reporting payments made to an attorney (Attorney's SSN/FEIN listed as Recipient).

Under IRC Section 6045(f), report in box 10 (of Form 1099-MISC) payments that:

• Are made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services, for example, as in a settlement agreement;

• Total $600 or more; and

• Are not reportable by you in box 1 of Form 1099-NEC.

[retzmacher_51]

Thank you @ToddL99!

It appears, from your research, that because I am not self employed and I received funds from a settlement that there should be "0" in box 10.  I will have to contact the Payer for further explanation and likely request a new form.  That then should allow me to complete my taxes without having to input information in box 10.

I do have additional questions. 

Is it normal for this form to have the 1099-MISC information on the top half but have w-2 information on the bottom half?  This form has this format.  On the back of the form, for the w-2 portion, it says for box 1 to enter this amount on the wages line of your tax return and for box 2 enter this amount on the federal income tax withheld line of your tax return.  It seems like I am also supposed to input this information as a W-2.  Have you seen this before and do I also add an additional w-2?  Or does the 1099-MISC already capture it as w-2 income tied to my current job and employer from previous years so there is no need to capture it again in a different section?

[JeffreyR77]

The W2 portion often reports the amount of the settlement that was back wages and the associated taxes that were also paid and withheld on your behalf. 

You should treat this as any other Form W2 you would receive.

Any portion of the proceeds that are not subject to payroll taxes are reported on Form 1099-MISC.

The types of payments that would be included on this form include attorney’s fees, punitive damages, emotional distress and other nonphysical injuries, and prejudgment interest. 

This is also taxable income to you and no taxes have been withheld.  

[retzmacher_51]

@JeffreyR77

I went back an input the w-2 information as an additional w-2.

So I must include the attorney's fees portion as taxable then? 

Why is it that Turbotax takes me directly to 'Your Business Status' and wants to make me file a schedule c?  The section says the IRS considers the money self employment income which is taxable.  I really don't understand why this is considered self employment income.  I am not self employed and this isn't imcome from self employment.  

This 1099-MISC/W-2 form is a headache and is what's holding me back from finishing filing my taxes this year.  

[ErnieS0]

If you are having trouble getting the 1099-MISC to work right, enter the amount in Other Income (in spite of what TurboTax says). If the 1099-MISC were entered correctly, it would end up in the same place (line 8 of Schedule 1).

• Click Federal in the left column
• Click Wages & Income at the top
• Scroll down to Less Common Income. Click Show more
• Start Miscellaneous Income, 1099-A, 1099-C
• Start Other reportable income
• Say Yes to Any Other Taxable Income?
• Enter a description (legal fees from 1099-MISC) and amount ($xxx)

Attorney’s fees are included in income because—I assume they were part of the settlement and not something you paid out of pocket. You can no longer deduct legal fees related to producing or collecting taxable income or getting tax advice.

[retzmacher_51]

@ErnieS0 

I just contacted the payer.  She had explained 50% is treated as income and 50% is treated as non wages.  She also said to ask about claiming an above line deduction for my pro rata share of attorney fees and costs.

I am assuming that explanation was answered by you stating I am unable to deduct box 10 (gross proceeds paid to an attorney) and you provided the link.

So then, to finish filing my taxes, I just want to confirm what I am doing before I submit.  I should delete the 1099-MISC that I have started and move it to that miscellaneous income section as you had mentioned.  Do I put the entire amount (sum of box 3 and 10) in that section? Or does only part of it go there?

I only ask because I assume I do not delete the w-2 portion and that part is already included as a w-2.  The amount in box 3 of 1099-MISC is the same wages the W-2 is reporting.

[DianeW777]

Yes, you can delete the Form 1099-MISC and then enter the income in the Less Common Income section.  You can enter the full amount shown in Box 10 and Box 3 (add them together) and the description should be Settlement.  These are the same steps provided by @ErnieS0.

1. Click Federal in the left column 
2. Click Wages & Income at the top
3. Scroll down to Less Common Income. Click Show more
4. Start Miscellaneous Income, 1099-A, 1099-C
5. Start Other reportable income
6. Say Yes to Any Other Taxable Income?
7. Enter a description and amount

Box 3 indicates this is not self-employment and should not be subject to the additional taxes associated with it.

[pricefam31]

There is no way around this that I can see. I will need to print out all the IRS forms and fill them out myself (grrrr...).  

I didn't have a lawsuit settlement, but did pay substantial legal fees for a disability denial reversal. I have spent hours and hours and hours in TurboTax trying every conceivable alternative to get turbotax to consider the legal fees as a deduction. TurboTax flat out refuses to consider the valid deduction and does  not even have the ability to ask me the right questions, such as whether the claim was under ERISA.

The deduction will make a huge difference in my taxable income. TurboTax is in error here because ERISA discrimination claims are not even considered in the TurboTax query when deciding whether to deduct legal fees and costs.  I want my hours of wasted time back.  grr... 

The relevant internal revenue code is: 26 U.S. Code § 62.  This lawyer does an awesome job explaining it all very clearly: https://disabilitydenials.com/disability-insurance-claims/can-you-deduct-attorney-fees-and-expenses-...

[PatriciaV]

Legal fees associated with discrimination lawsuits are deductible above the line, on the first page of your 1040, to determine your adjusted gross income. However, a few limitations apply here as well. You must be the party who was discriminated against and your lawsuit must have resolved after October 22, 2004. You can't deduct more than the amount you recover in the lawsuit. This deduction goes on Form 1040 Schedule 1 Line 8 and can include court costs as well as attorney fees.

To claim these fees in TurboTax, you can make a negative adjustment on Schedule 1.

• Go to Wages & Income
• Less Common Income
• Select Miscellaneous Income, 1099-A, 1099-C
• Select Other Reportable Income
• Any Other Taxable Income? Select, yes. 
• On the Other Taxable Income page: enter description: “Deductible Attorney Fees”
  Amount: enter in the adjustment amount as a negative number.

This adjustment will appear on Schedule 1 Line 8z (reducing Total Income) and is included on the amount on Form 1040 Line 9.

@pricefam31