Q: Settling on a wrongful termination case. My previous employer is insisting on taxing the full amount.
I want to change my w4 to exempt. I am currently not working and haven’t for several months. Can I claim exempt on the w4 before he issues the check?
A:
It depends on what your former employer is willing to do. To protect itself, the employer must use the status it used when you worked there so that it does not get hit with penalties and other assessments.
This is a risk management issue for the employer.
Good luck to you.
A: Under both California and federal tax law, certain portions of a wrongful termination settlement can be subject to taxes. While you may technically change your W-4 to "exempt," doing so doesn't necessarily shield you from the legal requirement to pay taxes on income, which may include settlement amounts. Failure to accurately report income and pay appropriate taxes can lead to penalties and interest from the IRS or California Franchise Tax Board, so it's crucial to consult a tax advisor for your specific circumstances.
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