How is a 2024 Workplace Harassment Settlement Taxed? Emotional Distress vs. Regular Income

I won a settlement against my former employer for workplace harassment in 2024, and I'm completely lost about how to handle the tax situation. My lawyer explained that the compensation will be taxed as emotional distress rather than wages, which apparently means a lower tax rate. But I'm confused about what amount I actually report on my taxes. Here's the breakdown: I was awarded $67,500 total. My attorney took their 40% fee ($27,000), plus I had to pay $1,200 for my portion of court costs. So I received a check for $39,300. When filing taxes, do I report the full $67,500? Or just the $40,500 after attorney fees? Or only the $39,300 I actually received? And how do I indicate on my tax forms that this was an emotional distress settlement rather than regular income? I already receive several 1099s from gig work (Lyft, GrubHub, etc.) that I've been doing for years, plus some other random income streams I've picked up lately. I'm worried about accidentally getting this settlement taxed at the higher rate that applies to my self-employment income. I always do my own taxes and want to keep it that way, but this situation is beyond what I've dealt with before. I don't want to mess this up and have the IRS coming after me! Any advice would be super appreciated - the whole tax situation is giving me even more emotional distress than the original case!

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18 comments

Morgan Washington

•8M

The tax treatment of legal settlements can definitely be confusing! For emotional distress settlements, you generally need to report the FULL amount of the settlement ($67,500) as "other income" on line 8z of Schedule 1 (Form 1040). However, you can also deduct the attorney fees. For attorney fees in unlawful discrimination cases (which includes sexual harassment), you can take what's called an "above-the-line" deduction on Schedule 1, line 24h. This means you can deduct the full $27,000 in attorney fees without itemizing deductions. The court costs of $1,200 would also be deductible here. You don't need a 1099 for this - the paying party should issue you a 1099-MISC with the full settlement amount in Box 3 (Other Income). If they don't send one, you still need to report the income. To indicate this properly, I'd recommend adding a statement to your return that explains this is for an emotional distress settlement, not self-employment income. This way it won't be subject to self-employment tax, just regular income tax.

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Morgan Washington

•8M

That's exactly right! You'll report the full $67,500 as income, then deduct the $28,200 in legal fees and costs on line 24h. The net amount of $39,300 is what will be included in your taxable income, which matches what you actually received. Regarding the 1099-MISC, they have until January 31, 2025 to send it to you. If you don't receive it by early February, I'd recommend contacting your attorney first. They can often help follow up with the company since they were involved in the settlement process. But remember - even if you never receive a 1099, you still need to report the income on your tax return.

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Kaylee Cook

•8M

I went through something similar last year with a workplace discrimination settlement. I was freaking out about taxes too! I ended up using https://taxr.ai to help me figure everything out. What was great is you just upload your settlement documents and they break down exactly how to report everything correctly. They explained that emotional distress settlements are taxable but not subject to employment taxes, which saved me a bunch. They also caught that I could deduct my legal fees as an "above-the-line" deduction, which my previous tax guy had missed completely! The site walks you through all the right forms and exactly where to put each number. Huge relief when dealing with unusual tax situations like this.

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Kaylee Cook

•8M

Yes, it works alongside all major tax software including TurboTax! You don't need to switch programs - you just get the guidance from taxr.ai and then input everything correctly into your existing software. They don't guarantee you won't get audited (no one can promise that), but they do provide specific IRS guidance related to your situation. What I found really helpful was getting settlement-specific advice rather than generic tax help. They explained exactly which forms and line numbers to use in TurboTax, which made it super straightforward.

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Oliver Alexander

•8M

Just wanted to update everyone - I actually tried taxr.ai after seeing it mentioned here. Total game changer for my settlement situation! It identified exactly how to handle my emotional distress settlement and guided me through reporting it correctly. The best part was they explained that I needed to include a written statement with my return describing the nature of the settlement to make sure it wasn't treated as self-employment income. I would have completely missed that step! Their guidance walked me through every form and line number I needed to use, and I was able to do everything in TurboTax just like normal. Would absolutely recommend for anyone dealing with settlements or other unusual tax situations. So much more helpful than trying to piece together advice from random internet forums!

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Adrian Hughes

•8M

If you're still having trouble understanding your settlement tax situation, you might need to talk directly with an IRS agent. I spent WEEKS trying to get through to someone at the IRS about my settlement last year. The automated system is useless and I kept getting disconnected after hours on hold. I finally found https://claimyr.com which is honestly a lifesaver. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they wait on hold with the IRS for you and call you when an actual agent is on the line. I was skeptical but desperate after my 5th attempt waiting on hold for nothing. Got connected with an IRS agent within a couple hours who confirmed exactly how to report my settlement and attorney fees. They told me specific forms and line numbers to use, and confirmed I didn't need to pay self-employment tax on the settlement amount. Saved me so much stress and probably prevented me from filing incorrectly.

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Adrian Hughes

•8M

No special access or line skipping - they use technology to navigate the IRS phone tree and wait on hold so you don't have to. They basically have systems that can stay on hold for hours while you go about your day. Then when a human agent actually picks up, they call and connect you immediately. The waiting is exactly the same length as it would be if you called yourself, but the difference is you're not the one sitting there listening to hold music for 3+ hours. In my case, they called me back about 2 hours after I submitted my request. I was grocery shopping when they connected me to an agent who was already on the line. Definitely not days later - that would defeat the whole purpose!

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Ian Armstrong

•8M

I have to eat my words about Claimyr. After my settlement this year (workplace injury), I was completely stuck on how to report it properly. Spent 4 hours on hold with the IRS over two different days and never got through. Reluctantly tried Claimyr after my previous skeptical comment, and they connected me with an IRS agent in about 90 minutes. The agent walked me through exactly how to report my settlement properly and confirmed I could deduct my attorney fees as an above-the-line deduction. For emotional distress settlements specifically, the agent confirmed they go on Schedule 1, Line 8z (Other Income) and that you need to include a statement explaining the nature of the settlement so it doesn't get misclassified. The attorney fees for discrimination/harassment cases go on Schedule 1, Line 24h. Honestly was worth every penny not to spend another day on hold. Sometimes you have to admit when you're wrong!

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Eli Butler

•8M

Just FYI - not all settlements are taxed the same way. Physical injury settlements are generally NOT taxable at all (IRS Publication 4345 covers this). Emotional distress stemming from physical injury is also not taxable. But emotional distress without physical injury (like workplace harassment) IS taxable. Also, that attorney fee deduction is ONLY available for certain types of cases like discrimination, harassment, whistleblower, etc. For other types of cases, attorney fees might only be deductible as miscellaneous itemized deductions subject to the 2% floor, which aren't even available until 2026. Make sure you know which category your settlement falls into!

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Eli Butler

•8M

You don't need to submit your actual settlement agreement with your tax return, but you should include a statement that explains the nature of the settlement and why you're reporting it the way you are. Something simple like "Line 8z includes $67,500 received as settlement for emotional distress from workplace harassment. Line 24h includes $28,200 in related attorney fees and legal costs." Keep your settlement agreement, court documents, and records of attorney payments with your tax records. If you're ever audited, you'll need these to substantiate both the nature of the settlement and the attorney fee deduction. The IRS typically has 3 years to audit, so keep those records for at least that long.

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