Those who have experience settling employment disputes know that one of the thorniest issues to arise after agreeing to the principal terms of a settlement involves how to describe the payment in the settlement agreement. The all-important corollary to that issue is how the payment should be taxed, if at all.
Recent anecdotal information suggests that the Internal Revenue Service (IRS) is scrutinizing settlement payments in employment and wage-based cases. This should come as no surprise given the agency issued a memorandum a year ago on the proper tax treatment of employment settlements with current or former employees. The memorandum, released by the Office of Chief Counsel on Aug. 30, 2013, goes through a variety of scenarios and fact patterns in describing the reporting requirements and tax treatment of employment-related claims.
