Include the income amount that you provided an employee in severance pay on the W2 form. Report the payment amount as wages in box 1, which means you must add it to the annual W2 income total. The Internal Revenue Service finds severance pay taxable during the year that an employee receives it. Withhold the appropriate amount of federal and state taxes from each employee that receives a severance payment from your business. Subject severance payments that you give to both Social Security and Medicare taxes. Remember that the IRS considers the severance pay as a supplemental wage, like bonuses or retroactive pay increases.
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