Withholding Issues When Legal Fees are Included in Back Pay Awards
Legal fees and interest awarded with back pay should be treated as follows for income tax withholding purposes according to Rev Rul 80-364, 1980-2 CB 294:
-
When a court allocated $8,000 as back pay, along with interest amounting to $1,000 plus a $1,000 attorney fee, only the $8,000 in back pay was subject to withholding.
-
An individual sued his employer for $15,000 in back pay and, under court order, received $10,000., The court order didn’t allocate what portion of the award was attorney fees or interest. The employee paid $1,000 for attorney fees., In this case, the whole $10,000 was subject to withholding.
• A union and company made a settlement agreement that the company would pay the union $40,000 in full settlement of claims. The union paid $6,000 in attorney fees and returned $34,000 to the employees for back pay. Only the $34,000 actually paid to the employees was subject to withholding.