Where to record a payment made for a legal settlement.

[drdownie]

I settled a legal matter out of court by paying the other party an agreed upon amount. This was from being in management of a previous employer that has since gone out of business. Where can I record this on the 1040 form? I've read in other areas that it should be a negative amount in the miscellaneous income area. Is this correct?

[ErnieS0]

Please clarify your question. What type of settlement was this?

You said, “This was from being in management of a previous employer that has since gone out of business.”

If you were an employee, why are you paying a settlement and not the company? Or were you also an owner?

And you are asking about the actual settlement payment, legal fees, or both?

[drdownie]

It was a medical discrimination case I happened to be named in along with his manager.  I was only an employee of this LLC that completely went under in 2020 with no officer / owner reachable for this case. The settlement was before going to court and no legal fees were paid to an attorney, since I represented myself at that point.

[AliciaP1]

Since you were not the business owner, you are not entitled to a deduction for the amount you paid in the settlement.  Settlement fees paid are only tax-deductible to a business and even then have certain limitations.

@drdownie 

[drdownie]

Does it matter that the State Attorney sent me a W-9 from the other party?

[Vanessa A]

No.  A W-9 is just to collect your personal information so they could issue a 1099-Misc to you for the settlement.  The W-9 is never sent to the IRS, it is just for the payers records. 

[Opus 17]

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@drdownie wrote:

Does it matter that the State Attorney sent me a W-9 from the other party?

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If you were the business, you would use the W-9 to issue a 1099-MISC to the payee.  Since you are not a business, you do not send a 1099.

As said, because you were a W-2 employee, you can't deduct personal legal expenses.

As a legal matter, the whole point of an LLC is to insulate the owner from liability.  If you were a W-2 employee of the business, you can't be held legally liable for the actions of the business unless you are also sued in your personal capacity.  I don't think you had any obligation to pay anything, and you probably should have obtained your own legal representation. 

[drdownie]

Unfortunately the attorneys that the company hired dropped representing us due to lack of payment, just prior to the company closing. Also the ones I personally contacted wanted 5 times the amount I paid in a retainer.  

[drdownie]

The company, myself and the other manager were being sued by the other party through the State agency.