I have a friend who received a 1099 with an amount in nonemployee compensation. The money was received as part of a lawsuit settlement where she suffered physical sickness due to mistreatment by a nursing home employee. This does not seem right to me that she was given the 1099 at all.

If you receive money, it is considered income, everyone is taxed on the income they receive.

If you win the lottery, or the keno jackpot, or even accept a settlement on a credit card balance, you have to pay tax on it.

Money received from a lawsuit, is no different, it is income.

Part of settement may be taxable depending upon:
1. Physical injuries or physical sickness settlements are generally non-taxable if you did not take an itemized deduction for medical expenses related to this injury in prior years.

2. Interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable.

3. Loss-of-use or loss-in-value of property settlements may be taxable if the settlement exceeds your basis in the property.

Read Publication 4345. Settlements — Taxability.