Settlement Tax Calculator

How settlements are taxed

Federal tax law starts from the position that all income is taxable unless a specific rule excludes it (26 U.S.C. § 61(a)). Settlement and judgment money is no exception, so the question is never just "is a settlement taxable" but what each part of it pays you for.

The IRS asks what the payment was intended to replace (IRS guidance on settlements). Money that replaces wages is taxed like wages. Money that pays for a physical injury fits the one big exclusion in the tax code.

That exclusion, 26 U.S.C. § 104(a)(2), covers damages other than punitive damages received on account of personal physical injuries or physical sickness, whether paid as a lump sum or in periodic payments. Everything outside it is generally taxable unless another rule applies.

The written allocation in your settlement agreement matters. The IRS generally will not disturb an allocation that is consistent with the substance of the settled claims (IRS Publication 4345), and when the agreement is silent it looks at what the payer intended.

Which parts of a settlement are taxable

The table shows the general federal treatment the calculator applies. Your agreement and facts can change any cell.

Physical injury and illness cases

Compensation for the injury, pain and suffering, medical bills and lost wages are generally excluded when the case has its origin in a physical injury or physical sickness. Congress said in 1996 that all damages other than punitive damages that flow from the physical injury are treated as received on account of it, even when the person receiving them is not the injured party (H.R. Conf. Rep. No. 104-737 (1996)).

Emotional distress is excluded when it is attributable to the physical injury (Treas. Reg. § 1.104-1(c)). Distress by itself is not a physical injury, even when it causes symptoms such as insomnia, headaches or stomach problems (H.R. Conf. Rep. No. 104-737 (1996)).

Compensatory damages in a wrongful-death case remain excludable (H.R. Conf. Rep. No. 104-737 (1996)). Punitive damages are taxable even in a physical-injury case (IRS Publication 4345). The one exception, 26 U.S.C. § 104(c), covers wrongful-death actions in a state whose law, as it stood on September 13, 1995, allowed only punitive damages in those cases, and it stops applying once that state's law changes (26 U.S.C. § 104(c)).

Medical costs you deducted on an earlier return come back into income to the extent the deduction lowered your tax (26 U.S.C. § 104(a) (prior medical deductions)). Interest on a settlement is generally taxable interest income (IRS Publication 4345).

Employment cases

Back pay, front pay and severance are wages. They are subject to Social Security and Medicare tax and to withholding, and are reported on a Form W-2 (IRS Publication 4345). Emotional-distress damages in a job case are taxable income (Rev. Rul. 96-65, 1996-53 I.R.B., H.R. Conf. Rep. No. 104-737 (1996)), except for amounts that pay for medical care for the distress (26 U.S.C. § 104(a) (emotional distress)).

For 2026, the employee share of Social Security tax is 6.2% on wages up to $184,500, and Medicare tax is 1.4500000000000002% with no cap (IRS Publication 15 (2026)). An extra 0.8999999999999999% Additional Medicare Tax applies above $200,000 for single filers and $250,000 for joint filers (26 U.S.C. § 3101(b)(2)).

Defamation, emotional distress and other non-physical claims

Damages for a harm that is not physical are generally taxable income, apart from amounts for medical care for emotional distress (IRS Publication 525 (2025)). The IRS notes that non-physical damages such as defamation or humiliation are generally not subject to employment taxes when they are not wages (IRS: Tax implications of settlements and judgments).

Workers' compensation and property damage

Workers' compensation paid under a workers' compensation act is generally excluded (IRS Publication 525 (2025)), but not a retirement pension figured by age or length of service (Treas. Reg. § 1.104-1(b)). If your workers' comp reduces your Social Security disability benefits, that part is treated as Social Security benefits and may be taxable (IRS Publication 525 (2025)), and pay for light-duty work after you return is taxable wages (IRS Publication 525 (2025)).

A property-damage recovery is not income up to your adjusted basis; it reduces your basis instead (IRS Publication 4345), and any excess is income (IRS Publication 4345). The expenses of getting the recovery, such as legal fees, are subtracted from the amount received before the gain is figured (IRS Publication 547).

Attorney fees: why you can be taxed on money your lawyer kept

When a recovery is taxable, the part paid to your lawyer as a contingent fee is still your income. The Supreme Court held this in Commissioner v. Banks, 543 U.S. 426 (2005), and the Tax Court applied it again in 2026 (Eiler v. Commissioner, 167 T.C. No. 3 (2026)).

Whether you can deduct those fees depends on the claim. Fees and court costs in a claim of unlawful discrimination get an above-the-line deduction, capped at the settlement income you report that year (26 U.S.C. § 62(a)(20)). The definition covers laws that enforce civil rights or regulate the employment relationship, including wage, discharge and retaliation claims (26 U.S.C. § 62(e)(18)), and listed civil-rights statutes such as 42 U.S.C. § 1983 (26 U.S.C. § 62(e)(13)), so a civil-rights case involving a physical injury can deduct the fees on its taxable parts. The same deduction covers federal False Claims Act claims, and whistleblower awards have their own (26 U.S.C. § 62(a)(21)).

Fees to recover profits of your own business are generally a business expense deducted above the line (26 U.S.C. § 62(a)(1)). Other taxable claims, such as defamation or a privacy claim, generally get no federal deduction for the fees. Miscellaneous itemized deductions are disallowed for every tax year after 2017 (26 U.S.C. § 67(h)), and the 2025 budget law made that permanent (Pub. L. 119-21, § 70110). In 2026 the Tax Court held that credit-reporting claims under the Fair Credit Reporting Act are not civil-rights claims for the deduction (Eiler v. Commissioner, 167 T.C. No. 3 (2026)).

A sexual-harassment or abuse settlement covered by a nondisclosure agreement does not change this for the person receiving it: the IRS says the recipient can still deduct the related attorney fees if they are otherwise deductible (IRS: Section 162(q) FAQ).

Example, computed by the calculator: a $100,000 emotional-distress settlement with a 40% fee leaves $60,000 in your hands. In a defamation case the taxable income is still $100,000. In a job-discrimination case the $40,000 fee deduction brings it down to $60,000.

In a physical-injury case, fees on the excluded part cause no tax at all. Fees on a taxable part, such as punitive damages or interest, follow the same rule as above. With $90,000 of injury damages and $10,000 of punitive damages, the taxable income is $10,000, fees included.

Forms 1099 and W-2

For payments made after 2025, a payer generally files Form 1099-MISC for taxable other income of $2,000 or more (IRS Instructions for Forms 1099-MISC and 1099-NEC), up from $600 (Pub. L. 119-21, § 70433). Payments of $600 or more in gross proceeds to an attorney are still reported in box 10 (IRS Instructions for Forms 1099-MISC and 1099-NEC). Wages go on a Form W-2.

A missing form does not make a taxable payment tax-free: the tax depends on what the money was for, not on the paperwork.

State income tax

This calculator is federal only. States set their own rules, and some differ from the federal treatment, or add limits, in ways that matter for a settlement:

• Pennsylvania does not treat damages as taxable compensation where pain and suffering, emotional distress or a similar noneconomic element was, or would have been, a significant evidentiary factor in determining the amount (61 Pa. Code § 101.6(c)), a test that is not limited to physical injuries. Interest is a separate class of income there (Pennsylvania Department of Revenue), so interest on an award can still be taxable.
• Massachusetts generally follows the federal approach: it taxes interest, lost wages or profits outside an injury case, and punitive damages (Massachusetts DOR), and it does not allow attorney fees to be deducted except in certain discrimination and whistleblower cases (Massachusetts DOR).
• California did not follow the federal disallowance of miscellaneous itemized deductions (California FTB), so certain legal fees may still be deductible on a California return if you itemize, above 2% of your adjusted gross income.
• New York itemized deductions include expenses paid to produce or collect taxable income (NY Form IT-196 instructions), counted only if you itemize on your New York return and subject to a 2% limitation (NY Form IT-196 instructions).

Check your own state's tax agency or a tax professional before relying on a state figure.

How the estimate works

Fees and costs are spread across the parts of the settlement in proportion to their size. That is a modeling choice: your fee agreement or settlement may allocate them differently.

The optional tax estimate subtracts the 2026 standard deduction ($16,100 single, $32,200 married filing jointly, $24,150 head of household; Rev. Proc. 2025-32 (2026 standard deduction)) from your other income, adds the settlement's net taxable income on top, and applies the 2026 rate tables (Rev. Proc. 2025-32 (2026 tax rate tables)). The result is the extra federal income tax the settlement adds.