A worker won an age discrimination settlement against his employer. His lawyer took a contingent fee (paid directly from the settlement). The tax court ruled the worker must report the full settlement amount as income, even though the lawyer's fees came straight from it. The worker can deduct the attorney fees, but only as miscellaneous itemized deductions with limits. This matters to subcontractors because settlement proceeds—whether from disputes, injuries, or contract claims—are taxable income to you, regardless of how much goes to your lawyer.
Settlement money is taxable income to you, even if your attorney takes their cut directly from the settlement check
You cannot reduce your reported income by the attorney fees paid—you must report the gross settlement amount