WITHHOLDING TAXES FROM SEVERANCE? An employee recently was asked to
resign, and did, in exchange for about 40% of his salary in severance.
 We agreed to pay this in three payments over the course of a year --
beginning in January. He's no longer an employee, as of last week.  Do
we withhold taxes from his severance?  This is in New York City, by
the way. He also asked if we'd be able to pay the money as an outside
consulting fee (he'd invoice us).  I don't know why he wants this, but
is that asking for IRS trouble?  Finally, is there anything else about
severance pay (we've never done it before) that I should be aware of
as the payer?  Thanks!

Howdy eddy05-ga,

A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."

If the payments you are making are characterized as being severance pay,
then yes, taxes must be withheld.  The Internal Revenue Service (IRS)
website has a publication titled "Tax Impact of Job Loss" which covers
this.
http://www.irs.gov/pub/irs-pdf/p4128.pdf

"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 Form 1099-MISC in box 7."

Here is a sample form that you might want to reference if you change
the current terms you have with your former employee, courtesy of the
severance-package.com website.
http://www.severance-package.com/simple-severance-agreement.html

"EMPLOYEE SEPARATION AGREEMENT AND RELEASE"

Keep in mind the above document might not be usable if the employee was
over 40 because "it lacks release language for federal laws protecting
older workers."

Even though the tips provided by Don D. Sessions, Employee Rights Attorney,
on the following website are aimed more to the employee, there are some
good hints for an employer as well, such as this one regarding unemployment.
http://www.job-law.com/articles/7312.cfm?vPage=7312

"The employer might be willing to classify your severance as a layoff,
termination, resignation or reorganization.  This might make a big
difference in your ability to obtain unemployment compensation or a
subsequent job."

If you need any clarification, please feel free to ask.


Search strategy:

Google search on: "severance pay" consultant
://www.google.com/search?q=%22severance+pay%22+consultant

Google search on: characterization severance
://www.google.com/search?q=characterization+severance

Also referenced the IRS web site at: http://www.irs.gov/

Looking Forward, denco-ga - Google Answers Researcher

Thanks for this well thought out response.

My pleasure eddy05-ga, amd thanks for the kind comment and 5 star rating.

Looking Forward, denco-ga - Google Answers Researcher