Severance Pay is Taxable Regardless of the Form it’s Reported On

The Tax Court ruled on Wednesday that severance pay received from a party other than the ex-employer is still taxable income to the recipient.

The case involved a man from Wisconsin who was let go from his employer in 2007. He received a severance payment of $10,182 from the employer’s sister corporation. At the end of the year, his employer sent him a W-2 for his regular wages and the sister company sent him a 1099 for the severance pay.

When the man filed his tax return, he included the W-2 wages but did not include the severance pay reported on the 1099. From the Court report:

Petitioner denied ever working for (the sister company) and initially disputed receipt of the severance pay reflected in the Form 1099-MISC. However, by the time of trial he stipulated that he had received a check for $10,182.80 from that entity. He contends that his former employer paid the severance from a different entity and reported it on Form 1099-MISC to avoid employment taxes and to shift the burden of such taxes to him.

It is odd that the employer/sister company reported the severance pay on a 1099 instead of a W-2. Still, the Court said severance pay is taxable income regardless of the form it’s reported on:

The record does not contain any explanation of why petitioner’s severance pay was paid by an entity other than the one that paid his wages. Nonetheless, there is no dispute as to the purpose of the payment, and it is income that petitioner should have reported on his return for 2007. See sec. 61(a)(1) (gross income means all income from whatever source derived and includes compensation for services, including fees, commissions, fringe benefits, and similar items). Petitioner’s suspicions concerning the motivation of his former employer are irrelevant to the taxability of the amount that he received.

The moral, which is especially important in this month of January, as tax documents start arriving: if you get a strange tax document, question it.

Image: renjith krishnan /