Your friend's personal injury settlement predictably was tax free because the money he received was attributable to the pain and suffering he experienced as a result of a physical injury. In employment cases, most of the time, emotional injuries stem from non-physical acts taken by the employer or an employee against you. Money received on account of such suffering is taxable, although most likely not as wages, and thus not subject to Social Security taxes. All damages received in lieu of past or present income are taxable as wages. See our site's page on taxation for further information.