Hello. I live in Illinois.
In 2006, I filed a complaint against a former employer with the Illinois Labor Dept. That complaint was for $3000 in unpaid W2 wages. In 2007, the Labor Dept. ordered the employer to pay me the $3000. The employer refused. So, the Labor Dept. referred the case to the office of the Illinois Attorney General (AG). In 2009, the AG's office took the case to court. The employer did not show up, and I was awarded a default judgement of $9000 ($3000 for the unpaid W2 wages and $6000 as a penalty against the employer for disobeying the original Labor Dept. order to pay me the original $3000).
So, the former employer owed me $9000. Recently, the AG's office succeeded in garnishing the wages that the former employer receives from his current employer. So, I will be getting my $9000 in 9 monthly payments of $1000.
I need to know how I should report the $9000 on my federal income-tax returns. My understanding is that I should treat $3000 of this money as W2 wages. I should report the $3000 on US Form 8919, and I should pay the Medicare and Social Security taxes on this money. I should also report this money on Line 7 of US Form 1040. Is my understanding correct?
The bigger question is how I should report the remaining $6000. This money is not wages that I earned. This is a penalty that the former employer has to pay me. So, if I should report this money at all, where on my federal income-tax returns do I report it?
Also, how do I report the $9000 on my Illinois state income-tax returns?
Thanks in advance for any information.