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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22830
Experience:  Taxes, Immigration, Labor Relations
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I am an officer of a company about to leave the company and

Resolved Question:

I am an officer of a company about to leave the company and the owners have offered me a 3 year non compete agreement. This agreement includes compensation for a year but not for services to be rendered. What type of taxes am I responsible for?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Such income is considered as wages and should be reported on W2.

Your employer will likely withhold taxes at flat rate 25% as for supplemental wages.

At the tax time you will report that income within your total taxable income and taxes will be calculated based on your total income, filing status, deductions, etc.

 

You may negotiate that payment will be partly in 2008 and partly in 2009 - that will allow to reduce tax pressure, but to find if you will save any taxes - you need to estimate your tax liability.

 

Customer: replied 5 years ago.
No, I guess I didn't mention that the compensation is to be paid through accounts payable and not payroll and suppose I would be issued a 1099 at year end. They told me I would be responsible for the regular income tax but not self employment tax because it is not for services performed by me. I am wondering if indeed I would be responsible for self employment tax.
Expert:  Lev replied 5 years ago.

Generally, if the compensation will be reported on 1099-misc - the IRS will expect self-employment tax - 15.3%.

If your total wages in 2008 is above $102,000 - you will only pay 2.9% Medicare tax.

 

However as such compensation is in connection with your employment it should be treated the same way as severance pay - that is incorrect to issue 1099-misc. Your employer if audited - may be required to reclassify the payment.

 

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22830
Experience: Taxes, Immigration, Labor Relations
Lev and 8 other Tax Specialists are ready to help you

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