Are liquidated and punitive damages subject to FICA taxes?
The term “liquidated damages” means damages for which the amount has been ascertained, either in a judgment or in an agreement. Typically, when a specific sum has been expressly agreed to by two parties as the amount of damages to be recovered in case of breach of an agreement, the sum is referred to as “liquidated damages.” It is necessary to look at the origin of the claim to determine whether employment taxes apply. Generally, FICA taxes apply to a dismissal payment. Punitive damages are awarded to punish or make an example of a defendant based on outrageous conduct. Punitive damages are awarded in addition to compensatory damages for actual monetary losses. Because of the nature of punitive damages, they will not be the equivalent of wages on account of employment and consequently are not subject to FICA taxes. Section 104 of the Internal Revenue Code deals with the treatment of punitive damages. Section 104(a)(2) excludes from income only “damages (other than punitive damages) rec
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