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A recent private letter ruling clarifies one time when checks to workers aren’t reportable on W-2s or 1099s. If you pay attorney’s fees to employees as part of a class action settlement, those payments are not subject to information reporting or federal employment taxes.
Bear in mind: Private letter rulings (PLRs) only apply to the companies seeking them. But they do give you an idea of how IRS looks at certain issues.
In this case, employees sued the company for unpaid leave and vacation time. As part of the settlement, the court ordered the company to pay attorney’s fees for the employees in the suit. According to the PLR, the awarding of attorney’s fees is essentially a reimbursement of an expense. Therefore, it’s not subject to taxes or reporting.
You can the download the PLR here to see all the details.