July 15, 1998
TO THE HEADS OF ALL STATE AGENCIES
|Attention:||Chief Administrative and Fiscal Officers, Business Managers, and Payroll and Personnel Officers|
|Subject:||Payment of Damage Awards|
The scope of this memorandum is limited to punitive and compensatory damages. A change to the Internal Revenue Service Code has affected the obligations of those who are liable for payment of damage awards resulting from legal action. A state agency may have occasion to pay punitive or compensatory damages. The purpose of this memorandum is to provide information to state agencies concerning the reporting of both punitive and compensatory damages payments to the Internal Revenue Service and the processing of such payments.
A provision of the Small Business Job Protection Act of 1996 amended Internal Revenue Code Section 104(a)(2) and restricted the exclusion of damages from the gross income of a recipient. The changes were effective for amounts received after August 20, 1996.
Punitive damages paid after August 20, 1996, including interest thereon, are reportable. Compensatory damages for personal physical injury or physical sickness are not reportable. If emotional distress is due to physical injuries or physical sickness, damages received for medical care for that emotional distress are not reportable. Other compensatory damages paid after August 20, 1996, including interest thereon, are reportable. The above-stated rules do not apply if an agency is making payments pursuant to a court decree issued before September 14, 1995.
Each agency should review with its assistant attorney general or general counsel any award or settlement involving damages and obtain instruction on which portions of which awards must be reported to the Internal Revenue Service.
If the damages payment is reportable and the recipient is an employee, the damages payment is paid through payroll and reported on a Form W-2. If the damages payment is reportable and the recipient is not an employee, the damages payment is paid through Accounts Payable and reported on a Form 1099 Miscellaneous.
These procedures apply to the payment of reportable damages to an employee.
- Online: Screen 047 or 190; R1; Amount; D/OE Code 21.
- Remote Job Entry: ZT transaction; same as above.
These payments are subject to deductions for FICA and retirement and are considered wages on the W-2 form.
These procedures apply to the payment of reportable damages to non-employees and the payment of non-reportable damages.
It is an agency's responsibility to indicate the reportability or nonreportability of the damages payment, as appropriate, on the CO-17.
All payments made through Accounts Payable require:
If a damage award is determined to have both a reportable portion and a non-reportable portion, an agency should contact the Comptroller's Accounts Payable Division before processing the award payment.
Questions concerning this memorandum may be directed to:
Accounts Payable Procedures:
Accounts Payable Division, 702-3403;
Payroll Services Division, 702-3463;
Policy Services Division, 702-3437.
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