I was let go in February 2017 and I had to lawyer up to get not only my unused vacation days, but also as my lawyer found out, a sizable chunk of unpaid wages/overtime, etc.
My settlement was paid in 3 different installments; my lawyer received the checks, then disbursed my percentage (minus her 1/3 commission). The first of those settlement was allotted as wages, and thus taxed as wages and paid via payroll check with payroll taxes deducted. The other two payments were via 1099.
How do I report this money on my tax returns? Will the first installment be recorded in my old company's W2? Or will I need to wait for a 1099?
That first payment should be reflected in your W-2 since it is wages. As for the rest of it, I dont know what it was for and therefore don't know how to treat it for tax purposes. If they give you a 1099 you will have a better idea of how to deal with it on your tax return. A capable tax preparer should be able to review all the documents and know what to do.
The wages are definitely taxable as such and included on your tax return. The fees to your attorney are unfortunately personal expenses and non-deductible. The other amounts on the 1099's may be reimbursements and not taxable - can't tell from the facts. They could also be taxable income if not reimbursements. Seek a tax professional to work through the numbers with you.
Mr. Lively is a Certified Tax Specialist by the State Bar of California Board of Legal Specialization. Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.
Unpaid wages and unused vacation days are taxable income as wages. The lawyer's fees are also taxable income to you. The only way legal fees are not taxable to you is if the claim involved some form of discrimination. That is why it is good to get a tax lawyer involved early in the case. If the dollar amounts about which you are talking are significant you should not talk to a tax lawyer; most CPAs will have difficulty with this.
Years licensed, work experience, educationLegal community recognition
Peer endorsements, associations, awardsLegal thought leadership
Publications, speaking engagementsDiscipline