# Reporting income on 1040NR



## snail (Jun 23, 2016)

I worked in the US for several years but returned permanently to Australia 3 years ago. Last year I received a payout from a class action against my former US employer for lost wages covering the time I worked for them. I have not worked for this employer (or any US employer) since leaving. The income was reported on Form W-2 (lost wages) and Form 1099-Misc (multiplier damages).

I was never a green card holder / US citizen, so now I need to file 1040NR. Are these payment considered effectively connected or not? Reading the tax guide for aliens it seems like the W-2 component is considered effectively connected but the 1099-Misc component would not be and should be reported on Schedule NEC.

I have also looked through the US-Australia tax treaty and don't find anything allowing me to exclude either component.

Thank you!


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## BBCWatcher (Dec 28, 2012)

Wow, great question!

I think you're exactly right about the W-2 income. Lost wages are still wages, and they're still taxed as wages. That means Social Security/Medicare, too (which should have been withheld if you were inside the U.S. Social Security system -- check your W-2).

The 1099-MISC income would appear to me to be both Effectively Connected (since it's connected to connected, if that makes sense) and ordinarily taxable. It's fairly rare that court payouts are nontaxable. Compensatory damages for physical injury, to pick an example, are generally nontaxable. I'd have to know a little more about the multiplier damages to give a firmer opinion, but I think that's going to be the treated the same way. It'll get reported on a different line, though. If it were a 1040 you'd report the W-2 income on Line 7 and the 1099-MISC on Line 21. I'd have to take another look at 1040NR to see what lines apply.

A bit more on U.S. Social Security: this is actually good news if you had Social Security withheld. Social Security doesn't care that the labor you performed was in some past year. Your Social Security contribution will be recorded in the year it was made (2015 or 2016, I assume). And that's (most probably) good because it'll go into your earnings history as some number of additional "credit quarters," up to 4. And that's good because if you hit at least 6 credit quarters you may qualify for Social Security retirement benefits, provided you have enough contributions to other treaty countries to get up to at least 10 years (when including your U.S. earning history). Anyway, maybe this is all moot, but it could be an extra bit of good news from the settlement.


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## JustLurking (Mar 25, 2015)

Does the 1099 show any US tax withheld? Does the payer know that you are not a 'US person', perhaps via filed W-8BEN?

My reading of publication 515 is that the payer probably should have reported this element of 'income' to you on form 1042-S and not form 1099. Form 1099 is for US persons, form 1042-S is its equivalent for NRAs.


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## BBCWatcher (Dec 28, 2012)

Perhaps, but it's still OK.

I should have mentioned that you'll pay the U.S. tax first and then Australia (where I assume you're resident) will most probably require you to report the gross income on your Australian tax return. Unless the tax treaty says otherwise. Australia most probably will allow you a foreign tax credit to subtract whatever your U.S. tax bill is, and then you'll pay Australia the difference (if any).


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## snail (Jun 23, 2016)

Thank you for your responses. The damages were statutory and not related to injury. There was no W-8BEN as I just received a check at my forwarding address in the US.


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## rsetzer99 (Feb 20, 2014)

BBC Watcher is correct. The W2 Portion goes on line 7 and the 1099 Portion on Line 21. 

The 1099 Portion will not be considered wages for SS purposes (Otherwise you would have to pay self employment taxes). The point made about your W2 is important in regard to SS benefits.


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## BBCWatcher (Dec 28, 2012)

FYI, on a 1040NR it'd be Line 8 and Line 21.


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