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Is severance pay subject to unemployment taxes for an

Hi Pearl. Is severance...
Hi Pearl. Is severance pay subject to unemployment taxes for an employer in NM?
JA: Because employment law varies from place to place, can you tell me what state this is in?
Customer: New Mexico
JA: Is the employment agreement "at will," union, full time or part time?
Customer: The employment is "at will" both full time and part time.
JA: Anything else you want the lawyer to know before I connect you?
Customer: No that is my only question.
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Answered in 2 minutes by:
10/5/2017
Ely
Ely, Counselor at Law
Category: Employment Law
Satisfied Customers: 102,773
Experience: Years of experience in running a medium sized law firm.
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Hello and welcome to JustAnswer. Please note: This is general information for educational purposes only and is not legal advice. No specific course of action is proposed herein, and no attorney-client relationship or privilege is formed by speaking to an expert on this site. You may also be offered a phone call, but those don’t come from me and are offered by the website and you are under no obligation to accept.

Great question. The answer - unfortunately - is yes. Severance pay is pay. It is income. As such, it is taxable as income, and part of that is unemployment tax.

Please note: If I tell you simply what you wish to hear, this would be unfair to you. I need to be honest with you and sometimes this means providing information that is not optimal. Negative ratings are reserved rudeness or wrong information. Please be kind!

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Customer reply replied 2 months ago
Hello Ely. That is what I thought. I just called the NM DWS and they said that it was a gift from your employer and that it was not to be reported on quarterly report. I believe the representative is incorrect. It is gift but is subject to federal and state income taxes as well as FUTA tax. Is that your assertion?

The answer is yes. I concur.

But... remember that there is a LOT of subjectivity. A creative CPA can technically categorize the severance as a gift, but in reality, we know it is not. I have seen some CPAs do it, but I think it is risky and invites an audit.

Kind Reminder: Please, use SEND button to keep chatting, or please rate positively and click SEND to submit your rating once satisfied. You may always ask follow ups at no charge before or after rating. "I STRIVE FOR FIVE!"

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Customer reply replied 2 months ago
Boy do I agree with you. The crazy thing is this information came from the NM Department of WorkForce Solutions that we report all earnings to. Here is my take. We pay severance just like the employee was on payroll for 3 to 6 months and report them to the state. We are charged unemployment tax so they are wages and an employee cannot collect unemployment benefits until severance pay has ended. Am I right?

Well... yes. At least I believe so. This is not (or should not) be an issue.

Now if you want to categorize it as a gift and not subject to this tax, that is fine. Again, just risky.

Kind Reminder: Please, use SEND button to keep chatting, or please rate positively and click SEND to submit your rating once satisfied. You may always ask follow ups at no charge before or after rating. "I STRIVE FOR FIVE!"

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Customer reply replied 2 months ago
I think if we categorize as a gift we would have a problem with the feds since they consider it wages from what I am reading since it is subject to all federal taxes. We want to offer severance but want to limit our UI rate as much as possible. I don't see how the state can grant unemployment benefits if we have to pay unemployment tax on their pay whether it is a gift or wages.

Consider this.

1) The severance can call the payment "income" or "bonus" or "settlement."

2) If "income" or "bonus," it is taxable. If settlement, then it is lump sum and no tax is taken out prior - the onus is on the ex employee to declare it.

Kind Reminder: Please, use SEND button to keep chatting, or please rate positively and click SEND to submit your rating once satisfied. You may always ask follow ups at no charge before or after rating. "I STRIVE FOR FIVE!"

Ely
Ely, Counselor at Law
Category: Employment Law
Satisfied Customers: 102,773
Experience: Years of experience in running a medium sized law firm.
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Ely and 87 other Employment Law Specialists are ready to help you
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Customer reply replied 2 months ago
We would never categorize a settlement so you answered my question. I guess I will have to get an official clarification from the state. I believe this rep doesn't really know state law. Thank you.

Sure thing. All the best.

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Ely
Ely
Ely, Counselor at Law
Category: Employment Law
Satisfied Customers: 102,773
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Experience: Years of experience in running a medium sized law firm.

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