Instacart Parent Maplebear Agrees to $5 Million Joint Settlement. A Retiree’s Back-Pay Check Could Complicate Social Security
A settlement check from a job you never got sounds like a windfall, but for a retiree already collecting Social Security, that payment can trigger a tax chain reaction that reaches far beyond the check itself.
A job he never got could bring a retiree a settlement check years later. But that unexpected payment might also raise the taxes on his Social Security benefits.
On October 20, the Justice Department and Equal Employment Opportunity Commission announced a $5 million joint settlement with Instacart’s parent, Maplebear (NASDAQ: CART | CART Price Prediction), over allegations that its hiring practices favored temporary-visa holders over U.S. job applicants. Instacart maintains it followed the law. Up to $4 million will compensate affected applicants from December 2023 through February 2026, while $1 million goes to the government in penalties.
Now picture a hypothetical applicant who’s 66 and collecting Social Security. No individual awards have been announced, but if he qualifies for a payment, the tax consequences could reach beyond the settlement itself. And if the money includes back pay, he’ll have another question about Social Security’s earnings limit.
Why the Label on His Check Matters
A settlement payment is taxed according to what it replaces. Even someone who was never hired can receive back pay for wages they would have earned if they’d gotten the job. That money generally gets treated as wages, reported on Form W-2 and subject to payroll taxes.
Other damages are usually taxable as well, but they aren’t wages and often show up on a Form 1099. Payment for emotional distress is one example. Some settlements are tax-free because they pay for a physical injury, but federal law says emotional distress is not treated as a physical injury, so that break rarely applies here.
The settlement terms and the administrator’s paperwork decide how each dollar is classified. The penalty portion goes to the government and never reaches claimants.
A $30,000 Recovery and the Benefit-Tax Test
To determine how much of your Social Security is taxable, the IRS combines your adjusted gross income (AGI), any tax-exempt interest and half your benefits. The result is called combined income. The higher it rises, the more of your benefits get taxed.
Say our applicant is single, collects $24,000 a year in Social Security and has $18,000 in other taxable income. With no other income or adjustments, his combined income is $30,000, making $2,500 of his benefits taxable.
Now add a $30,000 taxable settlement. His combined income jumps to $60,000, and the taxable portion of his Social Security climbs to $20,400. That’s another $17,900 in taxable income on top of the settlement itself.
The $20,400 represents 85% of his annual benefits, the maximum share the IRS can tax. His actual tax rate is determined separately.
Second Question: Back Pay and the Earnings Test
The Social Security Administration sets full retirement age (FRA) at 67 for anyone born in 1960 or later. At 66, our applicant hasn’t reached it yet. That matters because Social Security can temporarily hold back benefits from people under full retirement age (FRA) who earn above an annual limit. The rule is called the earnings test.
Back pay can count as wages, but Social Security generally assigns qualifying discrimination-related back pay to the years the lost wages belong to. If some of those years came before he started collecting benefits, that could change whether the earnings test affects him. A check received today doesn’t automatically count against this year’s limit, so he should ask Social Security how the payment will be assigned.
What Claimants Need Before Spending
- The tax form. Find out whether the payment comes on a Form W-2, a Form 1099 or both. The forms can help show which amounts represent wages and which are other taxable damages.
- The period covered. Know which months or years the back pay covers. Social Security needs that detail to assign it correctly.
- Damages split. Any money paid for harm other than physical injury, like emotional distress, is generally taxable even though it isn’t wages.
- Attorney fees. If a lawyer was involved, the full recovery may still count as your income. Federal law does allow a deduction for attorney fees and court costs in claims of unlawful discrimination.
- Withholding. Tax taken out of a back-pay check may not cover the extra tax on those benefits. He may need to make an estimated payment.
- Administrator records. Keep every notice, claim form and payment statement. Both the IRS and Social Security may ask for them.
Why the Settlement Says Little About His Check
The overall figure is the total federal resolution. Only part of it goes to applicants, and each person’s share then loses withholding, income tax and possibly tax on Social Security benefits. The amount he actually keeps could look very different from the amount printed on the check (the interaction between a one-time payment and benefit taxation is one of nine IRS rules we mapped in a free guide to retiree tax traps).
Before spending anything, he should estimate the taxes on his settlement and set aside enough to cover the bill. Each person’s filing status, other income and the exact payment labels can change the result, so check your own numbers before deciding.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
