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In Lieu of Notice Payment Florida

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  • In Lieu of Notice Payment Florida

    We have an employee terminating, and will be paying 2 weeks in lieu of notice (basically letting them go two weeks early, but will pay them for the 2 weeks when pay day comes around).

    My question is, how should this be taxed? Regular biweekly taxed, or supplemental (lump sum) tax?

    Thank you,

  • #2
    Others might disagree, but I don't see any reason this would be taxed any differently than regular earnings.


    • #3
      There are several legal possibilities, all of which are discussed in IRS publication 15 and !5A. IRS does not care which legal method you use as long as you pick one.
      - The easiest legal method is just to take all wages and tax using the normal pay period tax table and the W-4 instructions. This is called the Aggregate Method and is discussed in the Supplemental Withholding section. This is a legal method, but one employees do not like if too much wages are jammed into too little tax table. The employees have a point, but IRS does not care. Employers who fail to follow the law (IRC) risk having bad things happen to them.
      - It is maybe possible to take the wage not associated with the current pay period and tax them at a 25% Flat Tax. The one caveat with this method is legally there must be normal tax table withholding of the current pay period wages before the Flat Tax method can be used on the excess (Supplemental Wages). People sometimes try using this method for all wages in the current pay period, which is technically not legal.
      - Past that there are a few legal but oddball methods discussed in publication 15A. This methods are difficult to use and difficult to explain, but legal if done correctly. Most employers do not bother.
      - Then there are the illegal methods. Methods that the employer made up that are not supported by the IRC rules. Pretty much everything else.
      "Reality is that which, when you stop believing in it, doesn't go away".
      Philip K. **** (1928-1982)


      • #4
        Wouldn't the issue of higher taxes because of aggregating the wages be mitigated by the fact that these would be the only wages paid during the period? If I'm reading this correctly, the employee is getting the same pay that would have had they worked those two weeks and on the same pay date. The only difference is that they are not actually working.


        • #5
          Maybe. The key is that IRS does not care about "fair" or "mitigation". Just whether the action is legal. The Aggregate method is always legal. The Flat Tax method is mostly legal. Most "we thought of it" methods tend to be illegal. Not the question, but IMO the employer needs a really good reason (their reason, not the employee's) to move off those two methods. Just read Pub 15 and follow the rules as laid out.

          I understand your point that two weeks regular pay compared to two weeks non-regular pay taxed Aggregate should yield the same results. Which is fine. But not important (to the employer). The employer's sole concern should be taking legal actions. My concern is at what point the employer starts focusing on the results instead of the method, they risk using illegal methods to manage the results. Anyone who has done payroll has talked to employees who feel that their supplemental payments must have exactly the same FIT withholding percentage as their normal withholding payments. Which is not what the law says.

          Now are the FIT withholding rules poorly thought out and often unfair? Sure. I think the whole idea of on the one hand making the employee responsible for the correct withholding at year end and on the other hand greatly limiting the employee's ability to give focused withholding instructions to the employer do not make much sense. But laws are not supposed to "make sense". They are supposed to be followed. The employer really does not have a dog in this fight. The employer needs to pick a legal withholding method (as spelled out in the IRS publications) and follow it. Everything else legally is the employee's problem.
          "Reality is that which, when you stop believing in it, doesn't go away".
          Philip K. **** (1928-1982)


          • #6
            Originally posted by DAW View Post
            My concern is at what point the employer starts focusing on the results instead of the method, they risk using illegal methods to manage the results.
            Fair enough. That's a good point/argument all around.


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