The general rule
The IRS looks at what a payment replaces, a principle explained in IRS Publication 4345, "Settlements: Taxability".
- Refunds and reimbursements. Money that gives back part of what you paid for a product, or reimburses an expense or loss you had, usually isn't income.
- Lost wages or income. Payments that replace pay you should have earned, as in many employment settlements, are generally taxable.
- Penalties and interest. Punitive damages and interest are generally taxable.
- Physical injury. Compensation for a physical injury or illness is generally not taxable.
Will you get a tax form?
For larger payments, administrators may send a Form 1099 and ask for your taxpayer information first. Most consumer settlement payments are small and come without a form, but not getting one doesn't by itself decide whether the money is taxable.
Small payments from data breach and product settlements
These usually reimburse losses or refund part of a price, which generally isn't income. A flat payment that isn't tied to a loss is less clear-cut. If the amount matters for your taxes, or you got a Form 1099, ask a tax professional.
ClaimWell lets you record what each settlement paid you, so the amounts are in one place at tax time. Check which settlements fit you.