Settlement Tax Calculator

About the Settlement Tax Calculator

Winning or settling a lawsuit can bring a large payment, but the headline figure is rarely what lands in the bank. Contingency fees, typically a third or more, come off first, then case costs such as filing fees, expert witnesses and depositions. Then there is tax, which depends on what the money is for. Some settlements are tax-free; others are taxed on the full amount, including the part paid to the lawyer.

This settlement tax calculator estimates what you keep. Enter the gross settlement, the attorney's percentage, the case costs, the type of claim and your marginal tax rate. It shows the amount after fees, how much is taxable, the estimated tax and your net share, based on the outline of US federal rules.

How to Use the Settlement Tax Calculator

Enter the gross settlement and the attorney contingency fee percentage.

Enter the case costs.

Choose the type of claim and enter your combined marginal tax rate, federal and state.

The Formulas

  fee           = gross × contingency %
  before tax    = gross − fee − costs
  taxable       = 0                       physical injury or sickness
                = gross − fee − costs     employment or whistleblower
                = gross                   other non-physical claims
  tax           = taxable × marginal rate
  net           = before tax − tax

Step-by-Step Example

A 100,000 employment settlement, 33.33% fee, 5,000 costs, 29% tax rate.

  fee          100,000 × 33.33% = 33,330
  before tax   100,000 − 33,330 − 5,000 = 61,670
  tax          61,670 × 29% = 17,884
  net          61,670 − 17,884 = 43,786, 43.8% of the gross

If the same settlement were for a non-physical claim such as defamation, tax would be due on the full 100,000, leaving about 32,670. For a physical injury, you would keep the full 61,670.

Physical Injury Settlements

Under US federal law, damages received on account of personal physical injuries or physical sickness are excluded from income. That covers compensation for medical costs, pain and suffering, and lost wages that flow from the physical injury. Punitive damages are taxable, as is interest on a judgment. Emotional distress damages are tax-free only if they come from a physical injury; otherwise they are taxable, apart from reimbursement of medical costs for the distress.

Employment and Whistleblower Claims

Settlements for discrimination, wrongful termination, retaliation and similar employment claims are taxable. Back pay and front pay are wages, subject to withholding and payroll taxes. The good news is that attorney fees and costs in these cases can be deducted above the line, so you are taxed only on what you actually receive, as the calculator assumes.

Other Non-Physical Claims

For claims such as defamation, breach of contract, business disputes and emotional distress without physical injury, the settlement is generally taxable income. Since 2018, most individuals cannot deduct the attorney fees for these claims, so they can owe tax on money paid directly to their lawyer. This is why the net share for these claims can be so much lower.

How the Agreement Is Worded

The settlement agreement's allocation of the payment matters. Stating how much is for physical injury, wages, emotional distress, interest or fees affects the tax, although the IRS can look past wording that does not reflect the real claims. Ask a tax adviser to review the agreement before signing, especially for large settlements.

Choosing a Tax Rate

Use your marginal rate, the rate on your last dollar of income, plus any state tax. A large settlement can push you into a higher bracket for the year, so the effective rate on the settlement may be higher than your usual rate. Spreading payments over more than one year, through a structured settlement, can sometimes reduce the tax.

Structured Settlements

Instead of a lump sum, some settlements, particularly for serious physical injuries, are paid as a series of payments over years or for life, funded by an annuity. For physical injury cases, the payments stay tax-free. For taxable settlements, spreading payments over several years can keep income in lower tax brackets, but the terms must be agreed before the settlement is final.

Medical Liens and Repayments

In personal injury cases, health insurers, Medicare and Medicaid often have a right to be repaid from the settlement for medical bills they covered. These liens reduce what you receive, so ask your attorney to include them when estimating your net amount.

Paying the Tax

Settlement payments often have no tax withheld, apart from wages. A large taxable settlement can mean a big tax bill the following spring, and underpayment penalties if estimated tax is not paid during the year. Set aside the estimated tax as soon as the money arrives, and consider making an estimated payment for the quarter in which you receive it. A tax professional can work out the right amount and timing.

State Taxes

Most states follow the federal treatment, but a few differ, so include your state rate in the calculator.

Understanding Your Result

The headline gives what you keep after fees and tax.

The after fees line shows the fee and costs.

The tax line shows the taxable amount and the estimated tax.

The share kept line shows your net as a percentage of the gross.

When Should You Use This Calculator?

Use it when weighing a settlement offer.

Use it to compare the effect of fees and tax on different claims.

Use it to plan for tax due on a settlement.

Common Mistakes

Assuming all settlements are tax-free. Only physical injury damages usually are.

Forgetting tax on the lawyer's share. It can apply to non-physical claims.

Using an average tax rate. Use your marginal rate.

Signing without tax advice. The agreement's wording matters.