This is the ninth in a series of articles on issues surrounding the Taxation of Settlements and Verdicts. The chart below summarizes the withholding and payment obligations of the defendant/ payor.

 

Employee *

 

Non Employee **

Damage Award

Payments Combined with Wages but Segregated

Payments Combined with Wages But Not Segregated

 

Section 104

None

None

None

Emotional Distress

None

Withholding/FICA/

FUTA/SUTA

None

Back Pay

Withholding/FICA/FUTA/SUTA

Withholding/FICA/

FUTA/SUTA

N/A

Front Pay

Withholding/FICA/FUTA/SUTA

Withholding/FICA/

FUTA/SUTA

N/A

Medical Reimbursement

None

Withholding/FICA/

FUTA/SUTA

None

Medical Insurance Reimbursement

None

Withholding/FICA/

FUTA/SUTA

None

Pre Judgment Interest

None

Withholding/FICA/

FUTA/SUTA

None

Post Judgment Interest

None

Withholding/FICA/

FUTA/SUTA

None

Wrongful Refusal to Hire

Withholding/FICA/FUTA/SUTA

Withholding/FICA/

FUTA/SUTA

Withholding/FICA/FUTA/SUTA

Balance of Contract

None

None

None

Liquidated Damages

None

None

None

Self Employment (Payment otherwise deductible under IRC Section 165)

None

None

None

Wrongful Dismissal

Withholding/FICA/FUTA/SUTA

Withholding/FICA/

FUTA/SUTA

Withholding/FICA/FUTA/SUTA

Punitive

None

Withholding/FICA/

FUTA/SUTA

None

Attorney’s Fees paid directly to Plaintiff’s Attorney

None

None

None

Plaintiff’s Award and Attorney’s Fees paid to Plaintiff’s Attorney

Withholding/FICA/FUTA/SUTA for Wages –

Nothing for Attorneys Fees

Withholding/FICA/

FUTA/SUTA for wages

Withholding/FICA/FUTA/SUTA for Wages –

Nothing for Attorneys Fees

To Plaintiff From his/her Attorney

None

None

None

* Employment Taxes. In the case of payments to employees which qualify as wages, the payor is also responsible for the withholding and or payment, as applicable, of one or more of the following:

1. Federal Insurance Contributions Act (FICA) which includes the employer’s share of Social Security and Medicare tax;2. Federal Unemployment Tax Act (FUTA);3. State Unemployment Tax Act (SUTA)4. Collection of income tax and employee’s share of Social Security tax;5. If the taxpayer is a railroad employer, the Railroad Retirement Tax Act (RRTA) may apply.

** Backup Withholding. IRS Section 3406(a) requires a payor to deduct and withhold from a reportable payment a tax of 31% of the payment unless the payee supplies the payor with a taxpayer identification number. If the payor does not withhold and pay over the tax, he may be directly liable for it.