Understanding Taxes on Court Settlements in Manufacturing

In the mechanical manufacturing industry, where quality and precision are paramount, knowledge of the regulations surrounding taxes on court settlements becomes a vital component of financial planning. As with all areas of finance, a little research up front can help you in the long-term. This doesn’t just apply to small businesses in the manufacturing sector either. Whether you are bringing in hundreds of thousands or millions of dollars a year, it is important to have a well thought-out plan for your finances.

Those who receive large payouts in the manufacturing industry should be particularly careful when it comes to meeting their obligations to the governments regarding the taxes on their settlements. Otherwise, a court settlement can have adverse impacts on the financial security of a business. What can all manufacturers, especially those producing metal parts and other mechanical components, do to make sure this doesn’t happen to them?

As is the case in many instances, the revenue departments for each country will require a tax on “settlements”. Although “settlements” may be a catch-all for any number of ways in which you can be awarded money, it will almost certainly apply to any funds received through a legal settlement. When a dispute with an employee or another business arises, you may enter into a contract or reach a settlement to avoid or resolve litigation. In some cases, the settlement is required, such as in a wrongful termination lawsuit, for instance. Other times, it might be a good idea for all parties involved to enter into a settlement to avoid the costs associated with trial.

Even if both employees and employers are satisfied with the outcome, it is not uncommon for one or more parties to end up with an obligation for damages as part of the agreement. Either way, unless there is an explicit (written and agreed to) reason that the settlement may not be taxed, it is almost certain that you will have to pay. The question of liability is an important one to understand for anyone who has or is seeking a settlement for something that happened in the workplace, or, for various reasons.

Another definitive “rule” to keep in mind is the impacted party. If an individual has received the settlement, they will be required to pay the necessary taxes, provided that there is no reason why it should not be taxed. This also means that those who run businesses that are liable for a debt of some sort tend to bear this cost, and, therefore, are not usually able to avoid it. Simple enough, right? Well, not quite.

If you have read our recent article on Taxes on Court Settlements, you may have noticed that we qualify something that isn’t always considered. Under the current regulations, there is a stipulation regarding deductibles that does not seem obvious at first sight. As you read in the article, you may assume that any damages paid as part of a settlement are going to be treated as taxable income, but there may be situations under the law that mean that there is a portion of the payout that is non-taxable.

Let’s say that you received a settlement from another company in which there was a nondisclosure agreement or non-competition clause. In this situation, you might find that the non-compete is not subject to taxes. These are called “nondeductible elements”. Any damage awards for physical injuries, however, are almost always non-taxable for the receiving party, and recent legislation has made it so that most lost wages in relation to these payouts are also not taxable.

Regardless of whether you have deductibles in place or not, there will still be taxes on court settlements, and it is vital that business owners and those in the manufacturing industry understand what their obligations are. Working with a lawyer is a great way to make sure that your taxes are handled correctly. Although this might seem like a case of paying a pro to do what you can do yourself, regarding our previous example of what can happen when an employee sues for wrongful dismissal, making sure that you know what your obligations are and how they apply is much easier with someone in your corner to break it down.

Just because it seems like it should be a straightforward situation doesn’t automatically mean that it is. You don’t want to get taxed unfairly, of course, but you also don’t want to miss an obligation and get penalized on top of the amount due. Your one mistake could lead to others frequently doing the same because they just assume the government has it out for them. This is where you need to stand out. The way to do that is by avoiding the legal pitfalls and staying a step ahead of the game, whether the payout is mandated by a court or the result of settlement negotiations.