Some lawsuit settlements are subject to income tax. If you received a taxable settlement, in most cases you should receive a 1099-Misc in January of the following year, showing the amount of your settlement. Use this form to aid in preparing your tax return.
If you win a settlement in a lawsuit, the person or business that pays out the settlement, or that person or business's insurance company, is required to send you a 1099 if the settlement is taxable. Most settlements are taxable, unless the award was for a physical injury or illness. All other settlement proceeds -- including punitive damages and emotional distress (except when due to physical injury or illness) -- are reported on line 3 of 1099-Misc, Other Income. If you are awarded accrued interest, that amount will be reported on 1099-Int. The amount shown on your 1099 should reflect your entire settlement, including any amounts paid to attorneys. You can deduct the attorney's fees you paid as a miscellaneous deduction on Form 1040.
If the damages were less than $600, the payee is not required to provide you with a 1099. If the settlement you received was not subject to taxes, as is the case with damages awarded for a physical injury or illness, you should not receive a 1099. If you are awarded back pay, you'll receive a W-2 reporting that amount.