Congratulations! You have somehow managed to convince a very reticent employer and their all-powerful counsel to finally settle that difficult Family and Medical Leave Act (FMLA) case with you. The only thing left to do is to get paid, right? Guess again. Until the parties can agree on how the settlement payment should be reported to the IRS, the settlement will remain in payment purgatory. There can be a “sticking point” in these situations if a plaintiff is paid by W-2, because the defendant is obligated to deduct applicable taxes, withholdings for Social Security and Medicare and its employer tax, whereas a plaintiff paid by Form 1099-MISC is responsible for all of these taxes.

A recent case from the U.S. District Court for the Eastern District of Pennsylvania tackled this very issue. In Gunter v. Cambridge-Lee Industries, No. 14-2925 (E.D. Pa. July 14, 2016), Vincent Gunter filed an action alleging a violation under the FMLA. The parties reached terms of settlement as to a monetary amount but could not agree on how the proceeds should be reported to the IRS. The plaintiff argued the settlement proceeds were not wages and therefore not subject to withholding or reporting to the IRS with a Form W-2, but should be reported to the IRS on Form 1099 without withholding. The employer asserted that the settlement proceeds constituted wages to the plaintiff that must be reported to the IRS on Form W-2 subject to withholding of taxes and other payroll charges.

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