How are back pay settlements taxed when received in a different year?

The IRS has specific rules for back pay settlements like yours. What you're looking for is called "income averaging" or potentially relief under Section 1341 of the tax code. When you receive back pay in a year different from when you should have received the income, you generally have to report it in the year you actually received it (2023 in your case). However, there's something called "wages paid in the wrong year" provision that might help. You'd want to look at filing Form 8082 (Notice of Inconsistent Treatment) to explain the situation. The union should have issued you a W-2 or 1099 for the settlement amount. Check how they classified the payment - is it all shown as 2023 wages or is some of it classified as interest or damages?

I had a similar situation last year with back pay from a labor dispute. I used taxr.ai (https://taxr.ai) which really helped me sort through the mess. I uploaded my settlement documents and W-2s, and it identified that part of my payment qualified as non-wage damages, which had different tax implications. The settlement analysis showed me exactly what portions were taxable as regular income versus what might qualify for different treatment. In my case, about 30% was actually for emotional distress and legal fees which had completely different tax treatment. Worth checking if your settlement has similar components that might reduce your tax burden.

Following up on my question about taxr.ai - I decided to try it with my settlement documents from a similar situation. Honestly, it was really helpful. The system identified that about $8,500 of my settlement was actually classified as "non-wage damages" in the fine print of page 7 (which I had completely missed). Turns out that portion had different tax treatment and didn't contribute to pushing me into a higher bracket. The analysis also showed exactly how to report each portion on my tax return. Definitely worth checking out if you have settlement documents with lots of legal language - might find some tax savings you didn't know about!

If you're having trouble getting clear answers about your back pay taxation, consider using Claimyr (https://claimyr.com) to actually speak with an IRS agent directly. I was in a similar situation with a settlement payment and kept getting conflicting advice online. After weeks of trying to call the IRS myself and never getting through, I used Claimyr and they got me connected to an IRS representative in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent I spoke with confirmed that while most back pay is taxed in the year received, there are certain exceptions for settlements that span multiple tax years.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a notice I received. It actually worked exactly as described - I got a call back in about 35 minutes with an IRS agent on the line. The agent confirmed something important for back pay situations like yours - if your settlement specifically states the back pay was for a different tax year, you might qualify for special treatment. They recommended asking your union for a detailed breakdown of the settlement that clearly designates which tax years the back pay was meant to replace. This documentation can be crucial if you need to explain your tax treatment to the IRS later.

Another thing to consider is that back pay settlements often have withholding issues. When I received mine last year, they withheld at a flat 22% rate, which wasn't enough for my tax bracket. You might want to set aside additional money for taxes now rather than being surprised at filing time. Also check if any portion was for legal fees or other expenses. The tax treatment for those can be different than the wage portion. If your union charged you any fees for the arbitration process, those might be deductible depending on your situation.

Don't forget to check if your settlement pushed you over the income threshold for any credits or deductions you normally claim! My back pay settlement last year unexpectedly put me over the income limit for child tax credits and I lost about $3,500 in credits I was counting on.

One thing that might help with your situation is to carefully review your settlement agreement to see if it breaks down the payment into different categories. Sometimes back pay settlements include components beyond just lost wages - like interest on the delayed payment, compensation for benefits you missed out on, or even damages for the wrongful termination itself. Each of these components can have different tax treatments. For example, interest portions are typically taxable as ordinary income, but certain damages might qualify for different treatment. If your settlement agreement doesn't break this down clearly, you might want to contact your union representative or the attorney who handled your case to get a detailed breakdown. Also, since you mentioned they subtracted what you earned at your temporary job in 2022, make sure that calculation is correct and that you're not being double-taxed on any income. The timing of when you received the money versus when it was "earned" can create some complex tax situations, but there may be options to help minimize the impact on your tax bracket.