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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
"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.
"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.
"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
"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
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.
"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
If you need any clarification, please feel free to ask.
Google search on: "severance pay" consultant
Google search on: characterization severance
Also referenced the IRS web site at: http://www.irs.gov/
Looking Forward, denco-ga - Google Answers Researcher