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).
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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.
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