I received a lump sum award for a workmen's comp lawsuit I settled with the benefits company. I was under the impression workmen's comp was not taxable, however, this benefits company has now sent me (and the IRS) a 2020 W2 listing the entire lump sum as income in box 1. Now I have received a letter from the IRS demanding I pay tax on that lump sum ($60,000) along with penalties of course.
Was the benefits company wrong to list this lump sum award as income on a W2? If it's not supposed to be considered income why would they do this? Any help would be appreciated! Thanks!!
The IRS has declared that settlements and judgments are subject to taxability, excluding any income to cover damages received in regard to personal physical injury or physical sickness.
There are some stipulations, such as emotional distress, not being considered a physical injury. Additionally, if the compensation exceeds the damages for medical care, that may be taxable. The real answer to what is taxable and what is not is that it depends entirely on the situation, and the amount received as part of the settlement or judgment.
we can not offer a legal opinion as to what the settlement agreement provided. see a lawyer.