Sponsors (2)
The bill substantially increases the after-tax recovery for survivors of sexual assault and harassment (making settlements tax- and payroll-tax-free) and thereby lowers barriers to seeking redress, at the cost of modest federal revenue loss and added administrative and payroll-reporting complexity for taxpayers, employers, insurers, and the IRS.
Survivors of sexual assault and harassment (e.g., employees and other claimants) receive court judgments and settlement payments — including back pay, front pay, punitive damages, and attorney-fee reimbursements — excluded from federal income tax and from payroll taxes (FICA, FUTA, railroad retirement), increasing their net recovery.
By making covered recoveries tax-free, the change lowers the financial barrier to pursuing claims, which may encourage more survivors to seek redress through litigation or settlement.
The Treasury is directed to issue guidance to separate and allocate excluded amounts from other recovery components, which should clarify tax treatment and reduce disputes with the IRS over characterization of awards.
All taxpayers may bear modestly higher budgetary costs because excluding these recoveries reduces federal taxable income and therefore slightly lowers income and payroll tax receipts.
Taxpayers, employers, insurers, and tax authorities may face administrative burdens and disputes over how to define and allocate which portions of a recovery qualify for the exclusion, creating compliance uncertainty and potential litigation with the IRS.
Employers and insurers that pay settlements could face increased payroll reporting complexity and risk of withholding errors until Treasury issues implementing regulations and employers update payroll systems.
Based on analysis of 2 sections of legislative text.
Excludes from federal gross income and from wages for payroll-tax purposes awards, judgments, and settlements allocable to sexual assault, sexual contact, or sexual harassment claims.
Introduced February 13, 2025 by Kirsten Gillibrand · Last progress February 13, 2025
Excludes from federal gross income and from wages for payroll-tax purposes any judgments, awards, or settlements (including back pay, front pay, punitive damages, attorney's-fee reimbursements, and payments tied to releases) that are allocable to claims that an individual was a victim of a nonconsensual sexual act or sexual contact or of sexual harassment. Directs the Treasury to issue regulations or guidance to implement the exclusion and to separate excluded amounts from other components of a recovery. Also amends federal payroll‑tax and withholding definitions so these excluded amounts are not treated as wages or taxable compensation for Social Security, railroad retirement, FUTA, and wage withholding rules; the changes apply for taxable years beginning after enactment.