Client Received 1099 Misc with box 7 for attorney fees paid

[BP2020]

Client received 1099 misc with box 7 for $44k and this amount was paid by employer for the legal fees from an employment attorney last year to negotiate his severance/separation agreement.  How do we report income and expenses both are the same amount. If you can call please [phone number removed]

[Skylane]

not supposed to post phone numbers here.... the bots or moderators will remove it anyway...

Yes, attorneys are required to give 1099's for taxable settlements over $600. Ultimately, the 44K is severance and considered earned income to your client and is subject to SE tax. So, box 7 sounds correct . I believe you would include it on Sch C.

Hopefully some others will weigh in on this. I'm not certain.  

[Jim-from-Ohio]

There is a way to deduct legal fees "above the line". . don't have enough info in this case but here is some info on it....   I have seen a few employment related discharge cases.. the wage part of the suits though are supposed to be on a W-2... so not sure what is going on in this case you mentioned but some of these principals may apply..  if this is the first time you have seen something like this you may want to consider getting official help from someone, but here is some general info on the topic

https://www.accountingtoday.com/news/attorneys-fees-deductible-above-the-line

https://www.americanbar.org/groups/business_law/publications/blt/2019/11/gross-recoveries/

https://www.lawyers.com/legal-info/taxation/tax-audits/are-attorneys-fees-tax-deductible.html

[Accountant-Man]

What do you mean, income and expenses are the same? Unless the lawsuit was for discrimination, the income goes on page 1(or page 2, or whatever) but the expenses go on Schedule A but not anymore anyway.

[Jim-from-Ohio]

In some cases attorney fees can be deducted above the line.. replied earlier on the topic in thread

[qbteachmt]

Is there bodily injury, damage claim, discrimination claim? Is it back wages or compensation due to a wage claim? Are there punitive damage amounts? A claim of emotional distress or hostile workplace? Was this an insurance sales person? This matters if that is reportable in Box 3, Box 7, or W2. Details always matter.

"while payments for attorney’s fees are typically included in plaintiff’s gross income, they can often be deducted ‘above the line’ when calculating the plaintiff’s adjusted gross income. To qualify for an above the line deduction, the settlement of the claim should be made under one of the statutes listed under IRC § 62(e)."