Is severance pay taxable?
Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes.” There might be a good reason to consider placing your former employee into a consulting position rather than paying him severance, at least according to attorney Gary A. Paranzino. http://www.severance-package.com/ “As a legal matter, what the company has recently given to similarly- situated terminated employees becomes a standard to which the company can often be held.” You will want to read the above article in full. If your former employee were to be considered an independent contractor, and he was comsulting for the company, there would be no withholding, and you would report his fees on a 1099-MISC form. The following is from the IRS 1099-MISC instructions. http://www.irs.gov/instructions/i1099msc/ar02.html “Independent contractor or employee. Generally, you must report payments to independent contractors on
Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract is income in the tax year you receive it and must be reported with your other salaries and wages. For additional information on wages, salaries, and other earnings, refer to Publication 17, Your Federal Income Tax, in Chapter 6, or Tax Topic 401, Wages and Salaries.
