How to Report Severance Payments to the IRS as an Employer

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Form 941 and the instructions may be downloaded from the IRS website.
Form 941 and the instructions may be downloaded from the IRS website. (Image: Artifacts Images/Digital Vision/Getty Images)

Business and tax reporting requirements can be confusing. When, where and under what circumstances taxes are to be withheld is determined by the type of income or payment received. Business owners need to familiarize themselves with the various reporting requirements to make sure that they are withholding and reporting in accordance with the law and, most importantly, to avoid costly mistakes.

Things You'll Need

  • IRS Form 941
  • W-2
  • W-3

Report severance pay as supplemental income on the employee's W-2, Wage and Tax Statement, in the tax year in which the employee actually receives the payment.

Withhold income taxes from severance pay. Use IRS Form 941, Employer's Quarterly Federal Tax Return to report and pay income tax withholding and employment taxes.

Add severance payment of all employees together and report as supplemental income on the employer's W-3, Transmittal of Wage and Tax Statements.

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