If your employer refuses to pay you for overtime, you might find yourself in the middle of settlement negotiations after filing a wage claim. If your claim is successful, you could end up recovering more than just the wages your employer owed.
For example, it is common to take into account interest, penalties, and attorney’s fees when calculating a fair settlement amount. If you do receive a sizable settlement, though, it is important to consider the potential tax burden before using it all to catch up on bills that you missed during the weeks or months your employer refused to compensate you.
If your employer owes you oilfield unpaid overtime in Houston but you want to understand the tax consequences of a potential settlement before filing a claim, contact Moore & Associates. Since 2001, we have been serving clients and helping them resolve their complex employment law cases.
Our firm is proud of the fact that we only represent employees, and we exclusively practice in the field of labor and employment law to ensure our clients receive our full attention. Call 713-581-9001 to schedule a case evaluation with an unpaid overtime lawyer.
What Are the Tax Consequences of Settling an Employment Claim?
According to the American Bar Association, nearly all funds that a plaintiff receives following negotiations will count toward his or her taxable income for that year. In addition to compensation for unpaid overtime, which would have been taxable anyway, this includes funds for:
- Emotional distress;
- Interest awards; and
- Punitive/liquidated damages.
Compensation that will not contribute to an employee’s taxable income includes funds for certain attorneys’ fees and payments for physical injuries, which are usually irrelevant in employment law cases. Additionally, compensation for mental anguish is not taxable if it does not exceed the medical expenses that the plaintiff incurred as the result of emotional distress.
The burden of demonstrating which portion of the settlement is not taxable lies with the plaintiff. As a result, the employee’s attorney should ensure the settlement agreement contains an express allocation of all proceeds. Such an agreement is typically binding for tax purposes.
When reporting income earned from an employment law claim, there are two forms you will need. First, you will need to report any portion of the settlement that was intended to replace missing wages on a W-2, including overtime. Your employer will essentially treat these funds as a payroll check by withholding the appropriate amount for Medicare and Social Security.
If your settlement included any additional funds, you will then need to report them on a Form 1099-MISC under the “other income” portion. Your employer will not deduct any taxes from these proceeds, so it is up to you to put enough aside in order to cover the tax burden.
If you need an unpaid overtime lawyer in Houston to help you navigate the tax burden of settling a claim, contact Moore & Associates. Call 713-581-9001 to schedule a consultation. You can learn more about employment law in Texas by visiting usattorneys.com/employment-law/texas.
