Yes, much of the awards are taxable. Employees must pay taxes on any type of damages for lost wages and also for any type of noneconomic damages, such as pain and suffering. Section 104(a)(2) of the Internal Revenue Code provides an exclusion from gross income for damage awards received on account of physical injury or physical sickness. Any awards that do not fit under this exclusion are included in taxable income, which means that the employee or former employee must pay taxes on the award.

This also means that sometimes damages for emotional distress are taxable if they are not connected to a physical injury or sickness. You want to make sure to discuss this issue carefully with your attorney, because a lot of the time awards from employment discrimination cases are taxable and that factor needs to be taken into account carefully.