Q: What rate are non-personal injury settlement payments taxed at in California?
Employer agreed to pay me the rest of a contract amount after they breached their employment contract with me. Sent over a release agreement which I signed and then they sent the money via direct deposit the next day. When I received the check, over half the total, which was under $100k, had been withheld. Is this normal? I’ve never been paid a lump sum like this before, so I’m not sure. It seems it was paid via normal payroll and was taxed as if I was a W2 employee making over $1m a year (I was not making anywhere near this much).
A:
Non-personal injury settlement payments are generally considered taxable income and are subject to both federal and state income taxes. However, the tax rate applied depends on various factors, such as the nature of the settlement and your total taxable income for the year.
Regarding the withholding, employers are required to withhold taxes from settlement payments as if they were regular wages. This is because the IRS considers most settlement payments as taxable income, and employers must comply with tax withholding rules.
The amount withheld seems unusually high, though. Employers should use the current tax rates and withholding tables to determine the appropriate amount to withhold based on your income and the settlement amount. If they withheld taxes as if you were earning over $1 million per year, it might be an error on their part.
To resolve this issue, you should:
1. Review the settlement agreement and any related documents to understand the terms of the payment.
2. Contact your employer's payroll or human resources department to discuss the withholding and ask for clarification on how they calculated the amount withheld.
3. Consult with a tax professional or attorney specializing in employment law to better understand your rights and options.
4. When filing your income tax return, you will report the full settlement amount as income and claim the taxes withheld. If too much tax was withheld, you may be entitled to a refund.
Remember that while the withholding may seem high, it is an estimate of your tax liability. Your actual tax liability will be determined when you file your income tax return, taking into account your total income and any available deductions or credits.
1 user found this answer helpful
Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.
The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.
Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.
