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ddgandhi5
Returning Member

Tax Implications on a settlement reward

In 2017, I applied for a job at a company that I didn't get. Earlier this year in 2021, I got a letter saying I was eligible to receive money b/c of a legal settlement between said company and the department of labor which seemed legit (I verified this on department of labor .gov site). So I replied to the letter requesting to be apart of the settlement. Earlier this month in 2021, I got a check which I haven't cashed yet (no reason why, just kinda delayed on it), but I'm hoping to clarify some questions around it or at least be pointed in the right place. Below are some of the details of the money with the numbers I made up :


Gross Settlement Award: 3000
Wages: 2800
Interest: Blank/Empty
Total Taxes Withheld: 1000
Net Settlement Award: 2000

So I don't understand the difference between Gross Settlement Award and Wages. I got a w2 for 2021and a blank 1099-INT with the check and it seems I was only taxed on the wages, not the gross settlement award, but I received a check for the amount in net settlement award. If I add Net Settlement with Total Taxes, then it equals the gross settlement. Why wasn't I taxed on the gross settlement? Is this a mistake, i.e. should the w2 have shown the gross settlement award instead of the wages amount?

 

Also I paid state taxes to NY (shown on w2) but I live in TX where we don't have income tax and I've never paid state income tax before, just federal. I've never lived or even been to NY so will I have to file a state tax return for 2021 to NY because of this? Also should I have been taxed state income tax if I don't live in NY?

 

Let me know if I can provide any other clarifying detail.

2 Replies
Mike9241
Level 15

Tax Implications on a settlement reward

So I don't understand the difference between Gross Settlement Award and Wages. I got a w2 for 2021and a blank 1099-INT with the check and it seems I was only taxed on the wages, not the gross settlement award,

You would need an explanation of the reason for the difference. it could be a punitive damage award or something else.  you should have gotten a letter with the payment call them  

 

 

Also I paid state taxes to NY (shown on w2) but I live in TX where we don't have income tax and I've never paid state income tax before, just federal. I've never lived or even been to NY so will I have to file a state tax return for 2021 to NY because of this? Also should I have been taxed state income tax if I don't live in NY?

This is a legal question to be directed to the law firm that handled the settlement. The issue is that if the W-2 has NY W/H it has NY wages and that will cause issues if you don't file and pay the NY taxes.  you would have to convince the NY Dept of Revenue that you never lived or work in NY. mosy likely what NY would tell you is to get a corrected W-2.

 

 

 

Let me know if I can provide any other clarifying detail.

Opus 17
Level 15

Tax Implications on a settlement reward

If the entire settlement was $3000, that entire amount is taxable. Assuming that the gross wages in box one of the W-2 or $2800, the other $200 might be interest, or punitive damages, or it might have been a subtraction for attorney fees. But regardless, the entire amount is taxable. After reporting the W-2, which covers the first $2800, you would enter “other uncommon income“ or “other miscellaneous income“ in the amount of $200.

 

if New York State taxes were withheld but you were not a resident of New York State when you had a relationship with this company, then you would file a nonresident New York State tax return as part of your 2021 tax return package.  You would report zero New York State taxable income and you would report the withholding, which would generate a full refund of the amount withheld. New York might send you a letter asking why you had New York taxes withheld, and you would have to send a letter back explaining the circumstances.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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