Taxation of Terminations, Settlements and Judgments

Unless specifically exempted, every employer making payment of wages to an employee is required to withhold Federal income taxes and to pay such withheld taxes to the United States Treasury. IRC § 3402(a)(1). The term “wages” is defined as all remuneration for services performed by an employee including the value of remuneration paid in a medium other than cash unless specifically excluded. IRC § 3401(a). A similar (but not identical) set of rules apply to FICA withholding. IRC §§ 3101; 3121(a). This article discusses some of the more common forms of compensation paid to a terminating employee and whether such payments are subject to income tax and FICA withholding.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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