Severance:Tax vs 1099

Moria · May 2003

We recently accepted a "termination" x;-)from an over 50, female executive who had been with us only 9 months, with performance issues. We have offered her a very generous severance package. (We just want her gone, no fallout). She now wants us to not deduct the tax, and put her on a 1099 status for the final payout. Can we do that? My argument is that the severance formula was based on her employment (3 months salary, plus benefits)with us, therefore should be taxed. My CEO says that she is no longer an employee when we hand her the check.

What do you think? x:-/

Yahoo · May 2003

Can't quote you any law or regulation, but all of our severances in CO are withheld at the supplemental rate. No 1099s here.....

Margaret Morford · May 2003

I really don't think that's wise. She was never an independent contractor. You had full control over her the whole time she worked for you and offered her benefits. Besides, she will get both a 1099 from you as well as a W-4 in the same year. That absolutely means she'll get an IRS audit. Once that happens, you may find Wage and Hour on your door step. Don't do it!

Margaret Morford
theHRedge
615-371-8200
[email]mmorford@mleesmith.com[/email]
[url]http://www.thehredge.net[/url]

Don D · May 2003

I agree with Margaret. All I would consider doing for her different, if she asked, would be to allow her to fill out another withholding exemption form and base the final check on that. I would under no circumstances handle it with a 1099. In addition to having performance problems, this woman is also a tax cheat.

Moria · May 2003

This was a great exercise for me, and thanks to all of you for your input. The serverance pay must be taxed, and taxed at the supplemental tax rate, which is at 27%. Thanks again.

jimlegal · May 2003

I vote that you play it safe and take out the tax! The employee was never an independent contractor and you have stated no other reason to act otherwise. Now if this is structured as a settlement versus severance, that could change the entire matter. I suggest you consult with your company's attorney. Good luck.

Severance:Tax vs 1099

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