Classification of severance payments

[TXSponger]

What is the name of your state? Texas

I was recently terminated from my job as a C-level executive. No reason given other than "going in a different direction". I held the position for 8 years.

As part of the severance package (to be paid out over a year), the company had the separation agreement pay my severance/separation pay as an independent contractor. They claimed their payroll processor couldn't execute payments any other way. I know this isn't the case as the outsourced benefits processor is one of the largest in the country. , As this was a "take it or leave it" requirement. I signed it and now I'm on the hook for the employer portion of the employment taxes since the payments will now be self-employment comp. Further, the separation agreement also has me indemnify the company against any/all tax liabilities related to the payments. Note I did have an attorney review/comment on the agreement and she basically wanted to make sure I knew I was agreeing to this and that I'll owe those taxes.

Question: since I agreed to this concept in writing, is it legal for a company to re-categorize severance compensation as consulting fees and therefore get out of any tax obligations? I assume....it is what it is at this point, but am I wrong?

 

[adjusterjack]

I signed it and now I'm on the hook for the employer portion of the employment taxes since the payments will now be self-employment comp.

I don't think so. See Schedule SE Line 6 where you are given a 50% deduction off the self employment tax that goes on Line 27 of Schedule I.

https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
https://www.irs.gov/pub/irs-prior/f1040s1--2018.pdf
You end up paying only the half that you would have had deducted for FICA.

Check with your tax pro to confirm that.

At any rate there seems to be no doubt that you are being illegally misclassified as an independent contractor. If you want to raise a stink about it, who knows what will happen. You might even lose what's left of your severance. Might be best to leave sleeping dogs lie, don't poke the bear, don't put your foot in the bear trap to see if it works, don't spit in the wind, don't tug on Superman's cape, etc.

 

[Zigner]

Duplicate thread - see yesterday's thread at https://forum.freeadvice.com/threads/estimated-self-employment-taxes.657113/

OP should be able to afford a tax pro on this one.

 

[TXSponger]

thanks for the help.

Note that this thread has more to do with whether the company legally treated the separation the right way. I know companies regularly put terms in agreements that aren't always legal or enforceable which is what this thread was trying to understand. The other thread was to better understand my obligations and timing.

also....as an older employee where finding similar work is difficult at best (not to mention with kids in college and zero % shot at a penny of financial assistance)....I look to be frugal where I can. I'll see a tax pro, but I'd rather be armed with some knowledge rather than being completely blind. This forum is actually quite helpful in that regard.

 

[Zigner]

thanks for the help.

Note that this thread has more to do with whether the company legally treated the separation the right way. I know companies regularly put terms in agreements that aren't always legal or enforceable which is what this thread was trying to understand. The other thread was to better understand my obligations and timing.

also....as an older employee where finding similar work is difficult at best (not to mention with kids in college and zero % shot at a penny of financial assistance)....I look to be frugal where I can. I'll see a tax pro, but I'd rather be armed with some knowledge rather than being completely blind. This forum is actually quite helpful in that regard.

These questions refer to the same matter. It is preferred on this forum that you keep all your related questions in the same thread.

 

[Taxing Matters]

You end up paying only the half that you would have had deducted for FICA.

Not so. You pay both the employer and employee share of FICA. The 50% self-employment income tax deduction reduces your taxable income but that does not reduce your income tax enough to fully offset the employer share of FICA tax that you pay in self-employment tax.