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Key Cases in Determining Whether Damage Awards Are Subject to Employment Taxes

This report relates to 8 case(s)

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    Cheetham v. CSX Transportation, et al., 2012 U.S. Dist. LEXIS 49655 (March 5, 2012) (0 other reports)

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    Churchill v. Star Enterprises, 183 F. 3d 184 (3rd Cir. 1999) (0 other reports)

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    Churchill v. Star Enterprises, 3 F. Supp. 2d 622 (ED Pa., 1998) (0 other reports)

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    Commissioner v. Schleier, 115 S. Ct. 2159 (1995) (0 other reports)

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    Dotson v. U.S. 87 F. 3d 682 (5th Cir. 1996) (0 other reports)

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    Newhouse v. McCormick & Co., 157 F. 3d 582 (8th Cir. 1998) (0 other reports)

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    Social Security Board v. Nierotko, 327 U.S. 358 (1946) (0 other reports)

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    U.S. v. Cleveland Indians Baseball Company, 121 S. Ct. 1433 (2001) (0 other reports)

Author: Alice Gilman

Overview

Employees who recover back pay as part of an employment-related lawsuit are taxable on that back pay, just as if it had been earned. However, the nature of employees' recoveries is not always clear. Employees can receive compensatory damages for personal injuries, pain and suffering, or for lost earnings capacity. In seeking to shield damage awards from tax, employees rely on Internal Revenue Code (I.R.C.) § 104, which excludes from tax compensation for injuries or sickness.

+I.R.C. § 104 aside, the issue for employers is whether employment-related damages are taxable, and if they are, whether they are subject to employment taxes (ie, federal income tax, Social Security and Medicare [FICA] taxes and Federal Unemployment Tax Act [FUTA] taxes). The stakes for employers who get it wrong are high; the Internal Revenue Service (IRS) holds employers liable for penalties related to the employment taxes that should have been withheld.