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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3344
Experience:  15+ years tax preparation and tax advice.
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I need tax advice and documentation supporting a W-2 ...

Resolved Question:

I need tax advice and documentation supporting a W-2 dispute I am having with my former employer.
Submitted: 6 years ago.
Category: Tax
Expert:  Wendy Reed replied 6 years ago.

Hello there,

What type of dispute are you having?

Customer: replied 6 years ago.
Hi Wendy,
I seperated from my employer in August. As a part of my separation agreement, they agreed to pay for the balance of the lease on a home that I had in North Carolina (we had not sold house in Ohio). The separation agreement is very clear that I am responsible for taxes on the lump sum payment. For the lease, the statement was that the company would assume full payment of the lease. They have added those payments to my W-2. I believe that by stating that they were assuming the lease and they paid rental company directly that it is a business expense and the 22K they put on my W-2 should not show up as income to me.
Customer: replied 6 years ago.
They are trying to claim this as moving costs.
Expert:  Wendy Reed replied 6 years ago.

Hello,

I am confused by your description. You say that the agreement is very clear that the lump sum (your company paying the lease off) is a benefit that you are responsible for the taxes on. Since they are treating this payment as compensation, it is being added to your W2, and subject to tax. Then you object to it being added to your W2?

A business (your company) does write off or deduct wages/compensation as business expenses, but this does not negate the fact that this compensation is taxable to you as income. Even if they paid the leasing company directly, this is considered a "third party" transaction, in that they are paying exenses on your behalf.

In addition, even if this is considered "moving expense" reimbursement, the cost of breaking a lease or paying off a lease is not a deductible type of expense, so it would not be eligible to be treated as nontaxable compensation.

Customer: replied 6 years ago.
Wendy,

I am sorry.

There were two parts to the separation agreement:

Part One - a cash lump sum - "this payment is subject to all applicable taxes and withholdings."

Part Two - "company will assume full payment of the lease for the remainder on the current lease term of the home"

There is no "catch all" I am responsible for taxes on this. My point is that they assumed the lease and therefore this is an expense like any other office space, travel, or normal business expense.

Is that a potential interpretation I could argue with a leg to stand on, no matter how feeble??? :-) With the amount we are talking and their desire to not have me dispute with IRS, I think I just need to give them a viable out.
Expert:  Wendy Reed replied 6 years ago.

If they are open to negotiation, you may suggest that they "gross-up" the payment of the lease. This is a common strategy used when the employer desires that the employee receive the full cost of a benefit that is reduced because of income and payroll taxes.

When an amount is grossed up, there is an equation used that takes into consideration the employee's federal and state tax brackets, and adds the SS and Medicare %'s. Then, when this "grossed-up" amount is added to the employees income, he or she will realize the approximate value of the benefit.

For example, if you are in the 15% bracket, and pay approx. 10% SS, Medicare and state tax, and you receive a taxable benefit of 1000 dollars, you only see 750. So the employer would need to pay you approx 1332 dollars for you to realize the net benefit.

You could argue that your "agreement" does not state that you will be paying tax on the lease payment, and that you are prepared to dispute it with the IRS, and possibly with an attorney. Then you could suggest grossing up the lease payment as an "out" for them.

 

Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3344
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Thanks

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