Severance pay paid under an employment contract

[Guest Edward McElroy]

I understand that most severance payments are treated as dismissal payments subject to FICA and FUTA withholding. Is this the case even if the parties mutually agreed to the payments under an employment agreement? Are these payments considered wages and are they reported on a W-2 even though employment relationship is terminated. Any thoughts? Thanks

[Guest Peg H]

It is my understanding from past transactions that this type of severance pay IS fully taxable unless covered under a deferred comp. agreement. Of course it would be taxable at the time paid. I believe the only exceptions to taxable income have to do with settlements in wrongful termination cases, and even then only in certain circumstances.

[Guest Harry O]

Take a look at Rev. Rul. 58-301 where payments received for cancellation of an employment contract were *not* wages for FICA purposes. If, however, your payments were made pursuant to pre-existing provisions in the contract see Rev. Rul. 74-252. Here the payments were considered wages and subject to FICA. The distinction drawn by the IRS between the two rulings is a bit dubious, but that is the IRS's position . . .