Kemal writes:Hello,
I have received a severance pay for a year in a lump sum and my company withhold just 25 %. I think this is too less considering my total income for 2008 even though my company knows that the total income including severance would be count for a much higher tax rate? Do I have to pay the difference even though I cannot due to my unemployment?
Thanks for an advise.
My reply: Hello! I’m sorry to have to tell you, that yes, if you owe more in taxes then you have to pay the difference. If your reduction in income, due to your unemployment, makes it such that you don’t owe as much, then obviously you would not have to pay the difference.
Best wishes,
Gina
Esunsa writes: I agreed to a lump sum in exchange for waiving my claim for unpaid leave time. I received the payment 6 months after the last pay period I worked for the company. They chose not to withhold at the flat rate, but calculated instead as if I was paid the high amount in a two week period rather than applying the alternative aggregate method sanctioned by the IRS, grossly inflating my tax liability. I asked them to issue a check for the difference. Is there not a penalty that applies if they withhold too much and fail to correct the error? I read in an IRS publication that the employer need refund the amount over withheld from an employee’s check before the end of the year it was withheld. Does this mandate not apply in this case for some reason?
My reply: I’m sorry but there is no penalty for overwithholding. Since your letter did not work, you can ask an attorney to write a letter to your employer requesting your refund, if you wish. Please keep in mind that you will get your money back when you file your taxes at the end of the year.
Tami writes:I too am getting a severence from being laid off. 3 months. My employer checked with thier cpa and told me I can change my status to exempt so that only the mandatory tax, medicare, ss, etc. is taken out. They did this with our bonuses and we paid tax but it was not that much. Is this wrong? I am very worried after reading this.
My reply: If you formally change your W-4 then your employer is protected because YOU said it was “correct” by formally changing your withholding.
As long as you pay all your taxes by the end of the tax year then nothing will happen to you either. If by chance, since you’re now unemployed, you have a large tax bill and are then subject to penalties due to withholding at too low of a rate, you cannot ask your employer to pay those penalties. They would be your fault for completing your W-4 incorrectly.
If you can’t pay at all your taxes and you get in even more trouble with the IRS, again you can’t go after your employer for this - you will have to deal with the IRS on your own.
So technically it’s wrong if you lied on your W-4, but as long as you pay all your taxes and if you owe any penalties you pay them as well, then it’ll all work out alright.
Does that make sense?
Gina
Peter writes:I was terminated on Dec 31, 2008 and received a severance. However, the severance was paid in the first pay period of Jan 2009. The employer withheld taxes, but also all of the social security that would have been paid in 2009 had I been employed in 2009.
1. Should the employer have withheld all of the social security that would have been payable by me in 2009 from my one-time severance payment?
2. If my last day of employment was Dec 31, 2008, what is the proper disclosure to unemployment when they ask if I received any pay after Dec 31, 2008?
Thanks very much,
Peter
My reply: Hello Peter, thanks for visiting.
All payroll, including severance pay, is computed based on date paid, not period worked. So, if they paid you in 2009 it doesn’t matter if it was for work performed in 2008, they are required to withholding based on 2009 rules and regulations. Thus, it sounds like they correctly withheld your taxes for 2009. Since you did receive pay after 2008, if you are asked if you received pay after 2008, then the answer would be yes.
Best wishes,
Gina
Russ writes: I received a 12 week severance lump sum payout along with 2weeks vacation pay all in one check. They withheld about 40%. My W2 states my wages earned at $12k more than what my salary was. Will this cause me to be in a higher tax bracket. I keep hearing people tell me that I should get it back at the end of the year, but quite frankly I’m getting a little nervous about getting back any at all.
My reply: Russ, if you make more money and that pushes you into a higher tax bracket then you will owe more taxes. If you have withheld more taxes than you owe, the IRS will refund you the difference after they have accepted your return, unless of course you owe them for some other debt.
Kat writes: So I’m confused as a recently laid off individual.
1) does changing the exemptions on w-4 make a difference to the take home of the lump sum severance?
2) if yes then can one put something big like 15 on it?
THanx,
Kat
My reply: Kat,
Your employer has a choice, not you, regarding the withholding of your severance pay. If your severance pay is paid to you on the same schedule as your regular pay was when you worked there, then changing your W-4 may increase your take home pay on those checks. However, any time someone completes a W-4 that the employer believes to be false and/or any time someone completes a W-4 with at least 9 exemptions, whether or not the employer believes the W-4 to be false, the employer is required to report this to the IRS. The IRS will then ask you to justify your exemptions. If you cannot give them the names and social security number of 15 people who you support, you may be looking at a penalty. So, I really don’t recommend this; however I can see how in today’s economy you may be able to talk yourself out of the penalty, assuming you had a tax estimate and showed them that you have not under withheld.
Now, if your employer pays your severance in a lump sum, it doesn’t matter what you put on your W-4 because they will withhold at a 25% rate.
I hope that clears up some confusion.
Best wishes,
Gina
