Is severance pay diluted by payroll tax? — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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Q. My husband is receiving a corporate buyout. Will the severance pay be subject to payroll taxes? R.W., Scarsdale, N.Y.

A. Probably not. This has been an ongoing dispute between the IRS and taxpayers. In a landmark case handed down last year (Quality Stores, Inc., DC-MI, 2/23/10), a district court ruled that severance payments aren’t subject to payroll taxes when they are treated as wage-replacement benefits. However, the IRS hasn’t conceded the point, so you might face a challenge.

Tip: Expect this issue to resurface in another court case soon.

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