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Employee Severance Payments - 1099?

What are the IRS reporting requirements for severance payments? If paid through the payroll service then I know we've got it covered. What about lump sum payments that arise after the employee has been terminated? Any thoughts on withholding requirements would also be appreciated.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Lump sums through payroll must a) capture all FICA taxes - up to limits and b) w/h can be done in a variety of ways (I'll detail one such way).

The last time, we calculated what their ending salary would be (salary to date plus lump sum). We then calculated what the w/h on that salary would be based on exemptions. We subtracted was was already paid, and deducted the remainder.

This way they paid what they would have if that was their annual salary.

Anonymous
(Founder and President) |

Thanks Wayne. Yes I agree that's the right way to do it through payroll.

We also have situations where a terminated employee negotiates severance/release of claims and this can take some time. We recently had an employee terminated in December come to an agreement with the firm and they are now entitled to a lump sum payment. We're in a new year and they are no longer on payroll. We don't want to "re-hire" in order to make this payment through payroll.

What options should we consider?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Do it through payroll. It doesn't take much to "re-hire", make the payment and then terminate again.

Save yourself headaches.

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