While the parties in an employment dispute are focused on settlement, their counsel should be also planning for the taxation of the settlement proceeds. The substance of the underlying claim will drive the tax result. For instance, most employment settlements involve proceeds that are really lost wages for both income tax and tax withholding purposes. But other proceeds might also involve payment for a stock repurchase, pension adjustments or damages for physical injury, all of which have very different tax results. In a “no surprises” approach, the plaintiff and defendant should try to agree as much as possible about how the settlement will be allocated, which will generally be respected by the IRS.
In her April 2022 article, which was recently published by Law360 Tax Authority, Law360 Employment Authority and LexisNexis Practical Guidance, Cohen & Buckmann partner Sandra Cohen addresses the types of settlement proceeds, including payment of attorney fees, and how to plan for taxation.
Read the full Article Here (no subscription needed): A No Surprises Approach to Taxation of Settlements for Employment Claims
(Reprint is available with permission. Please contact Sandra@Cohenbuckmann.com)