The purpose of this notice is to ensure that employees are aware of the Internal Revenue Service (IRS) income reporting requirements when attorney fees are awarded.
In 2005, the IRS issued regulations that changed the manner in which attorney’s fees awards are to be treated for tax reporting purposes based upon the Supreme Court’s decision in Commissioner v. Baanks, 125 S. Ct. 826 (2005). Previously, when a payment of an attorney’s fees was made directly to the attorney, only the payment to the attorney was reported to the IRS on Form 1099-MISC, Miscellaneous Income. In Commissioner v. Banks, the Supreme Court concluded that attorney’s fees awarded as part of a plaintiff’s settlement are gross income to the plaintiff just like any other economic gain. Thus, pursuant to Internal Revenue Code Section 6041(a) and 6045(f), these fees cannot be excluded from the plaintiff’s gross income for tax purposes by assigning the gain in advance to another party, such as the plaintiff’s attorney.
Following are a number of different situations requiring variations in the reporting requirements:
Accounting Services (AS) will report any payment of attorney’s fees as income to the employee on the employee’s Form 1099-MISC. Further, AS also will report any payment of attorney’s fees made directly to an attorney on the attorney’s Form 1099-MISC.
Where the payment to the employee constitutes back pay or wages, the entire amount (including any amount that the employee may subsequently pay to his or her attorney from the back pay or wages) will be reported on the employee’s Form W-2 (and will be subject to employment tax withholding). Where the employee alone is to receive a check from the Postal Service™ (and the employee is required to pay his or her attorney from that amount), AS will not issue a Form 1099-MISC to the employee’s attorney.
If the payment is issued to both the employee and the attorney, then AS must report the entire amount of the payment (assuming that the payment is not for back pay or wages due the employee) on Form 1099-MISC for the employee. In addition, AS will report the entire amount of the payment (less any withholding) to the attorney on Form 1099-MISC.
— Payroll,
Controller, 11-4-10
