Lawsuit settlement for back pay

[jaycook9]

My research on this forum makes it clear that we must report a lawsuit settlement in 2019 (for back pay in previous years) as wages this year (2019) and must pay federal taxes on the gross proceeds, not the net amount after lawyer fees. In the settlement, my employer refuses to issue a W2, withhold for taxes, or contribute to my public pension. As a police officer with a public pension, we do not pay social security but do pay medicare. I've created a substitute W2 that shows $20k (settlement amount) for federal income, $20k for Medicare wages, and $0 for Social Security wages. The format of this extra W2 mirrors the W2 that the City will provide for 2019 wages. This seems logical and relatively easy to achieve in TT. However, when I submit this extra W2, the program does not appear to apply any Medicare tax to the $20k settlement amount on the W2. It does generate a Form 4852 which I'm advised to mail to Social Security if I want credit for this income.  Since I don't pay Social Security and don't get social security benefits from this job, this seems unnecessary, unless it's the only way to pay the Medicare tax that I owe on the $20k settlement. Any advice on how to resolve this Medicare discrepancy either within or outside of TT? Thank you!

[Anonymous · Accepted solution]

your "employer" has until 1/31/2020 to issue W-2.    they are required by law to issue a W-2 for back pay.   if they don't your first require to make attempts for them to issue W-2

if they don't by the end of February, you can request that an IRS representative initiate a Form W-2 complaint. Call the IRS toll free at 800-829-1040 or make an appointment to visit an IRS Taxpayer Assistance Center (TAC).

The IRS will send your employer a letter requesting that they furnish you a corrected Form W-2 within ten days.
The IRS will send you a letter with instructions and Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. You can use the Form 4852 in the event that your employer doesn't provide you with the corrected Form W-2 in time to file your tax return.
Depending on the time of year, the IRS may have federal wage information in the form of a wage transcript. See Topic 159 for more information on how to get a transcript of W-2 information.

When you call the IRS or visit a TAC office, please have the following information available:

Your employer's or payer's name and complete address including ZIP code, employer identification number if known (see your prior year's Form W-2 if you worked for the same employer), phone number, and
Your name, address including ZIP code, social security number, phone number, and dates of employment.

do not create your own w-2.  this will cause problems because the IRS will not have an employer copy.

proceed as above and if you don't get a w-2 complete the 4852.   the form would be filled out as if t were from your employer   wages and medicare wages 20K   social security wages 0.

as a w-2/employee, the legal fees are not deductible. prior to 2018  they would have been a deducted on schedule  A as a  2% itemized deduction. this deduction has been eliminated for 2018-2025 

[Critter]

Your attorney got paid to do a complete job...making sure the correct paperwork is issued would be a part of that commitment...contact the lawyer.

[jaycook9]

Thank you. Very clear and thorough. However, since the City has already refused to issue a W2, can I go ahead and notify the IRS of their refusal, since it is in writing as part of the settlement offer? I suspect the answer is to just play the game by the script, which I can do. Thanks again!

[jaycook9]

I appreciate the feedback, but my lawyer can't force a government entity to comply with IRS reporting requirements. We discussed this in conference with the City's lawyers, who are not as fearful of the IRS as an individual employer might be. The City's lawyer should advise them to issue a W2, but the City refuses to comply. Actually, there are dozens of plaintiffs in this case, so the City is going to get multiple IRS inquiries, which might prompt them to change their minds, but I doubt it. Governments do not have the same incentives to comply with such things, since no individual will ultimately be held accountable, just the taxpayers (eventually.) Once again, thanks for your help.

[jaycook9]

Dear Hackitoff, You're advice was spot on. I followed your script exactly and finally called the IRS on March 3, since my employer still refuses to issue a W-2 for back pay. The IRS advice was identical to yours and I have followed it exactly. My employer will get a letter from the IRS informing them to issue a W-2 and the fine associated with refusing to do so. I will also get a letter from the IRS informing me to file a Form 4852 if my employer still refuses to issue a W-2. One minor problem was that the IRS will only talk to the taxpayer who is missing the W-2, even for a joint return. Thank you!

As for Turbo Tax, the program does not properly calculate the Medicare Taxes due on this back pay. My employer did not withhold for FITW or for Medicare (we don't pay social security). Shouldn't Turbotax assess Medicare taxes on the Form 4852 income I entered? It did assess income tax properly. Do I need to manually enter this somehow and file a paper return?

[ThomasM125]

There is no way to pay the medicare tax in on your form 1040. You can contact the IRS and file a claim to have the employer pay it in along with a corrected W-2 form.

As a practical matter, the medicare tax is only 1.45% for an employee, so it's probably not going to make much of a difference if it is not paid in.

[jaycook9]

Form 8919 seems to indicate that the IRS does offer a way to pay uncollected social security and medicare taxes through the 1040, but only when an employer incorrectly issues a 1099 instead of a W-2. Very confusing distinction with my situation where the employer simply refuses to issue a W-2. There's no way my employer, a City, is going to fix this, but as you say, it's only 1.45%. I'm trying to do the right thing, but it's impossible. Thanks for your feedback.