Reporting a Bonus (partly deferred) Given to Retiree

[J Simmons]

An ER decides upon the retirement in 2009 of a long-term, staff EE to give her $50,000 (in addition to what she has in the company's 401k plan). The $50,000 was paid $12,500 on her last day as an EE, and then three like payments will come due, one each on the first three anniversaries of her last day as an employee. No separate funding is created to pay this; it will simply be paid from the ER's general assets.

The first $12,500 looks to be reportable on her 2009 Form W-2, whether considered a bonus, severance pay, or non-qualified deferred compensation. This is true as to it being FICA and FUTA income as well as taxable income.

My questions revolve around how the ER should properly report the subsequent payments, each to be made in a year in which she will not be an EE and not otherwise receive a Form W-2?

This $50,000 is FICA and FUTA income when there is no longer any substantial risk of forfeiture. Does the lack of separate funding to pay the 2010-2012 payments delay those payments as FICA/FUTA income until when and as paid? If so, to report those out year payments, is a Form W-2 proper?

At page 19 of the 2009 Instructions, it provides that non-qualified deferred compensation should be reported on Form W-2 if to an EE, Form 1099-MISC if to a non-EE, and Form 1099-R if to a beneficiary. Severance pay is to be reported on Form W-2.

For 2010, 2011 and 2012 out years, this person will not be an EE per se (albeit she will be a former EE). However, given the choice between just EE, non-EE, and beneficiary--former EE not being one of the choices--I'm thinking that the appropriate category is non-EE and thus a Form 1099-MISC.

Thanks in advance for your input.

[Everett Moreland]

The absence of funding for the 2010-2012 payments does not delay the application of FICA/FUTA.

The 2010-2012 payments are reported on Form W-2 because made by reason of the former employment relationship.

[J Simmons]

Thanks, Everett.