Neutralizing the Adverse Effect of State and Federal Income Taxes on Lump Sum Awards in Employment Cases
Michael Nieswiadomy and Thomas Loudat. 2019. Neutralizing the Adverse Effect of State and Federal Income Taxes on Lump Sum Awards in Employment Cases. Journal of Legal Economics 25(1-2): pp. 53–73.
This paper provides a methodology to ‘‘gross-up’’ an award when estimated losses are taxable such as in employment (e.g., wrongful termination or discrimination/retaliation) and non-physical injury cases. This solves a simultaneity problem wherein the award amount is a function of the income taxes paid, and these taxes are a function of the award plus other income in the year the award is received. This paper makes two contributions. First, it provides ‘‘gross-up’’ calculations in the context of several factors impacting income tax: investment income, Social Security and Medicare taxes, and Net Investment Income Taxes (NIIT) in the context of the Tax Cuts & Jobs Act of 2017. Second, it uses spreadsheet functions to iterate a user-friendly solution using an example calculating state and federal income taxes, Social Security/ Medicare taxes, and NIIT to determine the award. We also compare the accuracy of an approximation ‘‘gross-up’’ formula to the correct solution.
Michael Nieswiadomy, Thomas Loudat