The allocation memo that records which settlement dollars are wages, taxable damages, excludable damages, attorney proceeds or interest, and the checklist AP runs before the check: W-9s, joint checks, backup withholding, and the excludable payment you cannot hold for a W-9. Read it below, copy the text, print it, or download the .docx for your letterhead.
Template from tincompliance.com. Two documents in one file: a settlement allocation memo for the file, and the payment checklist AP runs before any settlement check is cut. The allocation in the signed agreement decides which forms go out; this memo records it so the 1099s, W-2s and 1042-S agree with the agreement a year later. Not legal advice; tax counsel reviews the allocation before signing.
Matter: [caption or claim number]
Payer: [legal name, EIN]
Agreement dated: [date]; payment due: [date]
Prepared by: [name, title]; reviewed by: [tax counsel]
Component | Amount | Payee | Form and box | TIN document |
Back pay or front pay (wages) | $[amount] | [claimant] | Form W-2; employment taxes withheld | W-4 on file |
Taxable non-wage damages (emotional distress not from physical injury, lost profits, contract damages) | $[amount] | [claimant] | 1099-MISC box 3 | W-9 |
Punitive damages | $[amount] | [claimant] | 1099-MISC box 3 | W-9 |
Interest (prejudgment or postjudgment) | $[amount] | [claimant] | 1099-INT (business interest, $600 or more) | W-9 |
Physical injury or physical sickness damages excludable under IRC 104(a)(2); workers’ compensation under 104(a)(1) | $[amount] | [claimant] | No return; not subject to backup withholding | None required |
Gross proceeds paid to the claimant’s attorney (any check payable to the attorney or the trust account, including joint checks) | $[amount] | [law firm] | 1099-MISC box 10, full amount of the check | W-9 from the firm |
Fees paid to the payer’s own counsel | $[amount] | [law firm] | 1099-NEC box 1 (corporate or not) | W-9 from the firm |
Payments to medical providers or lienholders the payer directs | $[amount] | [provider] | 1099-MISC box 6 (medical) or box 3 | W-9 |
Box 10 reports the whole check paid to an attorney whether or not the firm keeps any of it; the same dollars can also be a box 3 payment to the claimant. The $600 threshold for box 10 comes from Reg. 1.6045-5 and did not move when the services threshold went to $2,000 for 2026 payments. An excludable payment is not reportable and cannot be backup withheld on, whatever the TIN status (CCA 200906051). A nonresident alien claimant receiving taxable U.S.-source damages is a Form 1042-S and 30 percent withholding question, not a 1099 question.
[Describe what the claim was for, how the agreement allocates the amounts among the components above, and the paragraph of the agreement that states the allocation. Where the agreement is silent, state the facts that support the characterization: the complaint, the nature of the injury, the wage claim, and the attorney fee arrangement.]
Reviewed and approved: [name], [title], [date].
AP runs this list for every settlement before the check or wire goes out. Each box is initialed and dated; the completed list stays with the agreement.
☐ The allocation memo (Part 1) is in the file and matches the signed agreement.
☐ Every payee receiving a reportable amount has a Form W-9 (or Form W-8 for a foreign payee) on file: the claimant for box 3, box 6 or 1099-INT amounts; the law firm for box 10 and 1099-NEC amounts; each provider or lienholder paid directly. The name on line 1 is the legal name of the TIN holder, not the firm’s letterhead name or a trade name.
☐ Each name and TIN pair has been checked against IRS records (TIN Matching) and the result and date are logged.
☐ A payee whose amount is reportable and who has not provided a TIN after request: 24 percent backup withholding is applied to the reportable amount and the withholding is scheduled for deposit and Form 945.
☐ A payee whose amount is excludable (physical injury, workers’ compensation) is paid without a W-9 condition. Do not hold an excludable payment for a W-9; prompt-payment statutes run from tender of the release (Klee, N.Y. App. Div. 2010), and nothing on the payment is reportable.
☐ Joint checks: the check is payable to the claimant and the attorney, the box 10 return is to the attorney for the full amount, and the claimant’s box 3 return (if any) is for the claimant’s taxable share.
☐ Foreign claimant or foreign attorney: Form W-8BEN or W-8BEN-E on file; chapter 3 withholding applied at 30 percent or the treaty rate; the payment is routed to the 1042-S file, not the 1099 file.
☐ Wages component: routed to payroll, not AP; employment taxes withheld; W-2 at year end.
☐ Payee name on the check or wire matches line 1 of the W-9 exactly.
☐ The payment record carries the form and box from the allocation memo so the year-end 1099 run does not have to reconstruct it.
☐ Backup withholding, if any, is shown on the remittance and the payee is told the amount withheld and that it is a credit on the payee’s return.
☐ The agreement, the allocation memo, the W-9s or W-8s, the TIN match results and this checklist are filed together and retained with the year’s information returns.
☐ Year end: 1099-MISC, 1099-NEC, 1099-INT, W-2 and 1042-S amounts agree with the allocation memo; recipient copies by January 31 (1099-MISC with box 10 by February 15); IRS copies by the e-file date.
Completed by: [name], [date].
A general-purpose starting point, not legal advice. Your facts, and your counsel, control what you send.