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Severance Pay Question

Technical topics regarding tax preparation.
#1
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Is there any sort of limit on severance pay? Scorp client had a key employee that is no longer working at the company. The employee is an officer of the company but doesn't provide any services in this role either. Scorp wants to pay severance, at last rate of pay, for the remainder of the employee's life. (This is employee is not terminally ill.)

They have him on payroll and are taking out all the taxes and withholding. They'd like to put him on a 1099 but I'm guessing since he was an employee, he'd have to be on payroll.
 

#2
Nilodop  
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Did he own any stock in employer? If so, was it redeemed?

Sounds like this might be a non-qualified deferred compensation plan under section 409A. Was it a "plan" or more of a gesture decided at retirement? Isn't it just an unfunded retirement payment? Is there a contract or board resolution that describes it?

I don't see how IC treatment applies if he does not provide any services.

Maybe it's just terminology, but to me, severance pay usually relates to involuntary termination.

Here's a decent summary type article. https://rsmus.com/what-we-do/services/t ... oyers.html
 

#3
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The employee did not have stock. There is nothing in writing. It was an agreement between the owner and employee when the business started. Due to various issues, the employee does not provide any services. Severance doesn't have to be just for involuntary termination and it's something that can be pre-negotiated.

Unfortunately, this agreement wasn't really thought through and now the company can't afford to pay the severance and then replace this guy with another employee. However, the owner wants to live up to the agreement. I was hoping to find a way to make it a 1099. At least that would minimize the payroll taxes but I don't think that's an option.
 

#4
lucyko  
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A generic definition of severance pay is "an amount paid to an employee upon dismissals or discharge from employment " .Maybe you could get by calling the payment "severance "in the current year but beyond that I don't think it fits .

The lack of a written document explaining the nature of the payments , the oral contract between the owner and the employee to make these payments , and the actual payroll payments after separation, have created a big problem . Couple that with the S-Corps inability to continue these payments indefinitely is compounding the issue .It might be time for your client to seek legal assistance .

You mention that the ex-employee was a key employee and is currently an officer of the S-Corp . Maybe it's possible to elevate him to a director and pay reasonable Director fees which could be 1099.
 


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