LEV : Hi and welcome to Just Answer!Separation packages might include two types of payments - fringe benefits and severance pay - and are treated as supplemental wages - which are generally taxable. Some fringe benefits are specifically excluded from taxable income - for instance payments for health insurance, contributions to retirement plan, etc. Other fringe benefits that are not specifically excluded - are taxed as wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses.
LEV : Supplemental wages are subject of FICA and regular withholding. Normally employer withhold 25% in federal taxes. If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39.6% (or the highest rate of income tax for the year).
Customer: Thanks for the response however, I want to know if the company can bat the taxes for severance pay or must it be paid by me. I am raising this as a negotiation point and must write something today.
LEV : Employers pay employer's part of FICA and employees are subject of employee's part of FICA and income tax withholding - federal and state.
Customer: meant pay, not bat sorry for the typo
Customer: Can the employer pay the employee's portion of FICA and income tax if agreed to, similar to a gross up on moving expenses.
LEV : Withholding is not your tax liability - the purpose of withholding to cover possible tax liability. Your actual tax liability is determined when you file your tax return - and if withholding was more than your actual tax liability - you will claim a refund.
Customer: Hi Lev,
LEV : Your employer may not pay taxes for you - but may increase the payment to cover your tax liability. For instance - if you receive $1000 - your employer's part of FICA is 7.65% or $76.5 and your employee's part of FICA is also $76.5. You may negotiate that instead your payment will be $1076.5 - but FICA will be calculated based on that amount.
Customer: Ok, I get what you are saying, I can ask them for the amount to be net $Xdollars, with all applicable taxes covered.
LEV : In other words - if your employer compensate you for any tax liability - that amount will be considered as additional pay to you.
Customer: Thank you, XXXXX XXXXX been very helpful to me.
LEV : If you expect large separation pay - you might want to negotiate that a part of the pay will go to your retirement account - in this case - there will not be FICA liability - and will not be any withholding. Also your income tax liability will be deferred.
Customer: As I am currently in the market and the severance is less than $50K, I think I need to have all of it available if I don't secure employment immediately.
LEV : Then - your situation is different - if you might need funds now, but you might expect that the total amount will be added to your taxable income.
Customer: Totally understand and would prefer it that way.
LEV : So - you may expect that your employer will withhold 25% for federal tax liability.Most likely - you will be if 25% tax bracket - and there will not be any additional tax liability when you will file your 2013 tax return - but you might want to estimate your possible tax liability.
Customer: My computer crashed in the midst of your answer. I apologize, I am back
LEV : No problem - take your time.
Customer: I think you've answered the question. I will need to ask that the final amount be net inclusive of all applicable taxes, witholdings and deductions.