Many cases of sexual harassment go unreported. However, when those who suffered come forward to bring their harassers to justice, many victims worry that if they succeed in obtaining a sexual harassment settlement, they might have to forfeit a significant amount of money in taxes. Those worries stemmed from tax law reforms passed at the end of 2017, which were put in place to prevent hush money in sexual harassment settlements.
Previously, if a victim of sexual harassment accepted a settlement that included signing a non-disclosure agreement (NDA), they gave up the right to treat their attorney’s fees as exempt. For example, in a case that resulted in a $250,000 settlement, the plaintiff would be taxed on the entire amount, even if they paid a contingency fee to a sexual harassment lawyer. The lawyer, in turn, would also have to pay taxes on the income they receive. Thus, this results in double taxation and the Internal Revenue Service (IRS) would receive tax paid from both parties.
IRS Addresses Confusion in Tax Code
The IRS recently addressed the question of how to handle sexual harassment victims’ contingency fees in settlements. Victims have the right to deduct lawyers’ fees from the settlement they receive, even if they signed an NDA as part of the agreement. Still, all victims of sexual harassment need to be very careful before signing any settlement. Tax implications are everywhere in settlement agreements, including toward the injuries suffered.
In general, compensatory damages awarded to a plaintiff for physical injuries are not supposed to be taxed. However, compensatory damages for emotional injuries, such as anxiety or depression, can be taxed. The IRS heavily considers the description and order of events. If physical injuries resulted from the emotional injuries, they may be taxable. For example, if the depression developed first, a resulting migraine is taxable. Vice versa, if your injury causes depression, that cannot be taxed.
Chester County Sexual Harassment Lawyers at The Gold Law Firm P.C. Advocate for Victims of Sexual Harassment in the Workplace
If you were a victim of sexual harassment in the workplace, the Chester County sexual harassment lawyers at The Gold Law Firm P.C. are ready to help. Call us today at 215-569-1999 or via our online contact form to arrange a free consultation. With office locations in Philadelphia and Pennsauken, New Jersey, we serve clients in Bucks County, Chester County, Delaware County, Montgomery County, and throughout South Jersey.
