Self Employment Tax on 1099 Misc (Lawsuit Settlement)

Forum|Forum|1 year ago
March 17, 2025
1 reply
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My wife and I are on full-time paid jobs. My wife received a W2 and a 1099-MISC and 1099-INT for a lawsuit settlement (for prior wages). Towards the end of State tax review, it gives an error asking for Business Code and after researching on TurboTax forums, it seems likely that the 1099-MISC details entered could be treated as Self-employment
However, the section where 1099-MISC was entered said if this is lawsuit settlement, then the system will not treat it for tax, so not sure where it is getting missed as the final paperwork is showing self-employment tax and asking for a business code

Please advise on how to fix/resolve this

TurboTax PLUS Online

LeticiaF1

You shouldn't need to enter a business code if the lawsuit is entered as other income on the federal return. TurboTax transfers data from your federal return to your state return. Before you begin troubleshooting your state return, go back through your federal return and make sure everything is correct.

After you review your federal return, select the State Taxes tab and review the state section. Pay close attention to the information, especially if you have made changes to your federal return. There might be new sections that need to be completed.

To enter the settlement:

Go to Wages & Income
Scroll to the bottom under Less Common Income, select Start (or Update) for Miscellaneous Income.
Choose Other reportable income
Answer Yes to Any Other Taxable Income
On the next screen enter the description and amount

Your settlement will now get reported as Other Income on your tax return. ‌Feel free to reach back if you have any other questions.

Troubleshooting common federal to state transfer issues

If you continue to have issues, please let us know and give us more details on what state you are having issues with.

kshettyAuthor

Thank you for the quick response. Just to clarify - the below is the level of detail on the lawsuit settlement

A) Gross Settlement Payment - $$$ (B + C + D)

B) 1099-INT $$$ (Amount is > 600, so reportable as per the form)

C)1099-MISC $$$ (Amount is > 600, so reportable as per the form)
D) Wages $$$

E) - Tax on Wages
F) Net Wages = D - E
Net Settlement award = F + B + C

So, as per your suggestion, should I just enter Net Settlement award in that section, OR

Do I need to enter separately -
1) 1099 INT,
2) 1099 MISC (this most likely prompted the self employment tax despite entering it as Lawsuit Settlement)
3) Net Settlement Award as "Other Reportable Income"

PatriciaV

Employee

Yes, enter Form 1099-INT under the Interest & Dividends topic.

Enter Form 1099-MISC under the Income from Form 1099-MISC topic. Be sure to check the box for "Lawsuit Settlement" and for "Includes back wages" then enter the net amount of wages paid with the settlement.

You do not need to report the net settlement award, as the previous entries are sufficient. The 1099-MISC Box 3 income will appear as a positive number and net wages will appear as a negative number on Form 1040 Line 8(z) - effectively reporting the "net settlement award."

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