The opinion of the court was delivered by: Honorable Lois H. Goodman United States Magistrate Judge
OPINION REGARDING ALLOCATION OF SETTLEMENT PROCEEDS
This matter comes before the Court on applications made by Plaintiff, Diane Josifovich [Docket Entry No. 36], and Defendant, Secure Computing Corporation [Docket Entry No. 38], through their counsel, for a determination as to whether employment tax withholdings are appropriate with regard to any or all of the settlement proceeds in this matter, and, if so, how those settlement proceeds should be allocated. Additionally, Plaintiff has requested that the settlement proceeds be increased by the amount of any withholdings. For the reasons discussed below, the Court concludes that Defendant must withhold employment taxes from a portion of the settlement proceeds, specifically the amount allocated as back pay and front pay. Because the Court cannot determine the appropriate amount of the allocation based on the record before it, the Court will schedule a hearing, at which counsel may present argument on the limited issue of the actual allocation of the settlement proceeds, based on the conclusions and findings set forth in this opinion. Finally, this Court declines to award Plaintiff any additional monies to compensate her for any negative tax consequences that may result.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
On or about September 21, 2007, Plaintiff Diane Josifovich ("Plaintiff") filed a complaint against her former employer, Defendant Secure Computing Corporation ("Secure" or "Defendant"), in the Superior Court of New Jersey, Law Division, Somerset County, which Secure then removed to this Court [Docket Entry No. 1]. On February 19, 2008, Plaintiff amended the Complaint (the "Amended Complaint") [Docket Entry No. 11].
In the Amended Complaint, Plaintiff alleges, among other things, that Defendant failed to pay her earned commissions, and that Defendant violated the New Jersey Conscientious Employee Protection Act ("CEPA") and the New Jersey Law Against Discrimination ("LAD"). Plaintiff seeks various forms of relief, including: (1) back pay, (2) front pay, (3) emotional distress damages, and (4) attorneys' fees and costs.
On May 29, 2009, this Court conducted a lengthy settlement conference, which resulted in a settlement of the claims asserted in the Amended Complaint. At the conclusion of the settlement conference, counsel for the parties put the essential terms of the agreement on the record, with the express representation that the terms would eventually be set forth in a formal document to be executed by the parties.
At some point, counsel notified the Court that while reducing the settlement agreement to writing, the parties had been unable to reach agreement with regard to whether the settlement proceeds were subject to the withholding of employment taxes. The parties both agree that at least a portion of the settlement proceeds are in fact taxable; the only issue therefore is whether Defendant could, or indeed, must, withhold taxes from any portion of the settlement proceeds payable to Plaintiff and, if so, how much of the settlement proceeds should be subject to withholding. Neither party raised the issue of withholding during the seven-hour settlement conference, nor was it part of the terms deemed essential and put on the record at the conclusion of the settlement conference.
A. Withholding of Employment Taxes
At the outset, it is important to clarify what the issue is that the Court is called upon to determine. The parties' dispute does not focus on whether tax treatment is an essential term of the settlement or on whether there is any reason not to enforce the agreement. Indeed, it is clear that terms relating to the tax treatment of a settlement agreement are not considered essential, but rather are part of the implementation of the settlement agreement. See McDonnell v. Engine Distributors, No. 03-1999, 2007 WL 2814628, at *8 (D.N.J., Sept. 24, 2007), aff'd, 314 Fed. Appx. 509 (3d Cir. Feb. 24, 2009). Accordingly, there is no issue as to whether the settlement agreement is enforceable.
Similarly, whether the settlement proceeds are taxable, or whether they constitute gross income, is not before the Court. The sole issue presented by the parties, therefore, is whether any portion of the settlement proceeds is subject to employment withholding taxes. See Plaintiff's Brief ("Pl. Brief") at pp. 2, 7, 10. Defendant contends that any portion attributable to "pay" is subject to withholding and that Defendant, as an employer, must therefore withhold employment taxes. See Defendant's Brief ("Dft. Brief") at pp. 1, 3-4. Plaintiff, by contrast, argues that no portion of the settlement proceeds should be subject to withholding. See Pl. Brief at pp. 2, 5-7. Thus, Plaintiff contends that she should receive the entire gross amount of the settlement, and any tax payment will be her obligation, not that of her former employer. See Pl. Brief at p. 10.
Gross income, which is defined in 26 U.S.C. §61(a) as "all income from whatever source derived, including (but not limited to) the following items: (1) [c]ompensation for services, including fees, commissions, fringe benefits, and similar items," differs from income subject to withholding taxes, which is confined to wages. Central Illinois Public Service Co. v. U.S., 435 U.S. 21, 25 (1978) (finding that lunch reimbursements to employees did not constitute wages). As the Supreme Court explained in Central Illinois, while income and wages may be related and may overlap, the underlying concepts are not the same. "Wages usually are income, but many items qualify as income and yet clearly are not wages." Id. (footnote omitted). Indeed, the Court in Central Illinois pointed out that mandatory withholding tax is by definition a narrower concept than gross income taxability. Id. at 29.
For withholding tax purposes, an employer has a legal duty to deduct and withhold taxes when "making [the] payment of wages," and the failure to do so may subject the employer to liability. See 26 U.S.C. §3402(a)(1); 26 U.S.C. §3403; 26 U.S.C. §3509. The term "wages" is defined in the Code as "all remuneration . . . for services performed by an employee for his [or her] employer." See 26 U.S.C. §3401(a).
In Social Security Bd. v. Nierotko, 327 U.S. 358, 365-66 (1946), the Supreme Court held that a back pay award should be treated as wages, reasoning that "'service' as used by Congress in this definitive phrase [of the Social Security Act] means not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer." The Court further noted that the words used by Congress, "any ...