legal settlement when leaving employment

[gn]

If an individual taxpayer leaves their employer and gets a settlement which is reported to them on 1099-MISC box 7 non-employee compensation. Is this subject to FICA taxes? They also received a W-2 for wages earned with FICA etc., taxes withheld. The amount on the 1099-MISC was a settlement agreement to separate employment. Is this subject to FICA taxes, or is it simply other income? 

[qbteachmt]

A "settlement" agreement for What?

Wages are put on W2. Box 7 seems like an error. I recommend following up to get a correction.

[gn]

The wages are on a W-2 the additional amount is for a settlement agreement where the employee leaves their job and the employer for an additional amount. Its not back pay or lost wages more of an agreement to leave and not talk about the situation. I'm sure most have seen a client or two leave under circumstances such as this. I'm not too sure where the non employee compensation goes I'm assuming line 7a other income but not subject to FICA etc. so no form 8919 required? 

[qbteachmt]

"for an additional amount. Its not back pay or lost wages more of an agreement to leave and not talk about the situation."

Does that make it Termination/Severance Pay? Was there a lawsuit, or just an "agreement?"

There needs to be a lawsuit to have a settlement, and a lawsuit will have stated Grounds for the suit.

"I'm sure most have seen a client or two leave under circumstances such as this"

Sure; and we've all see lots of wrong 1099 documents issued, as well.

"I'm not too sure where the non employee compensation"

Box 7 is for Services performed; not a Legal Settlement or severance pay.

So either:

It's Termination Pay and incorrectly reported, should have been on the W2, and yes, Subject to FICA.

Or, it's not Box 7, but some sort of settlement for a qualified reason that would make it not subject to FICA.

[BobKamman]

@gn  “more of an agreement to leave and not talk about the situation”

Talk about what situation?

A “settlement” doesn’t require filing a lawsuit. Cases are often settled out of court, usually with a nondisclosure agreement. An NDA should make an exception for the parties to tell their tax preparers enough details to sort out the tax questions.

The types of payments that would be included on a 1099 include attorney’s fees, punitive damages, emotional distress and other nonphysical injuries.  But these should be shown in Box 3, not Box 7.