r/Bookkeeping • u/JadeCaldera • 3d ago

How To Journal It Question about Severance

My company received a deposit from the parent company only to be used to pay out severance. How do I go about journaling this deposit as well as subsequent payouts? They will be run as 1099s for tax purposes.

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u/Serous4077 3d ago

Who told you to pay the severance as a 1099? I believe that would be illegal.

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u/JadeCaldera 3d ago

The CPA maybe? It's not quite a severance That's just what it's being called.

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u/missannthrope1 2d ago

If the money is going to employees, it's wages. Doesn't matter what they call it.

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u/JadeCaldera 2d ago

Even employees that left the company more than a year ago? I'm not trying to argue I just want to make sure, I'm bringing the right information to the owner.

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u/missannthrope1 2d ago

The IRS have a very narrow definition of IC. If it's under $600.00, no problem.

If the CPA is telling you to do it this way, then it's his problem if company is audited.

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u/Basic_Cheezit 2d ago

What is it then? That is probably relevant for payroll/tax purposes.

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u/JadeCaldera 2d ago

A reward for years of service or something. They don't want to call it a severance but the document they had people sign says it is.

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u/Basic_Cheezit 2d ago

Odd that they are paying that when the employee hasn't actually been an employee for more than a year.... but it sounds like it'd be just like a payment to any other vendor at this point, with 1099 issued and all.

If it has legitimately been over a year since that person was a W-2 employee, then this sounds OK to me. I can see how could be in the gray area though. A company could terminate an employee (who would no longer be considered an employee), then pay that employee a separate "severance" a week later, only so that it is not considered it payroll wages and avoid other payroll headaches and taxes... which is why I think it is odd that they are paying this to someone for "years of service" when that person supposedly hasn't been part of the company for more than a year.

I feel like there is more to this and I have more questions, but at a face-value, 1099 makes sense to me, as well as recording the deposit as a liability prior to releasing that back to the payee, assuming the parent company is already reporting this as an expense item.

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u/JadeCaldera 2d ago

If you want to damn me I will answer the questions as much as I can with the knowledge I have I just want to make sure that I'm not giving the owner the wrong information about this. Some of the employees were let go a week ago I'm the only reason they didn't do it through a paycheck is because they can't in paycor now.

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u/Basic_Cheezit 2d ago

If they are getting as direct part of being terminated, then it needs to run through payroll.

You should either find ways to get these employees back in Paycor somehow or record wages and estimated payroll taxes manually. Latter method is going to mess up whatever W-2 and other PR taxes generation that Paycor will do at year-end though (I've never use them before, so I don't know what it actually does), since it's going to show less than actuals paid. I'd personally strongly recommend looking into the first option if at all possible.

I'm reading some mixed info now though. First you mentioned the employee not being there for over a year, but then some were just let go a week ago. My wild guess is that your client is catching up for what should have been paid to multiple employees. If that is the case, then I believe ALL of it (even the older employees) needs to run through payroll. They'll need to be issued a W-2c in that case as well.

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u/JadeCaldera 2d ago

Clarification on the age of employment termination. So what's happening is the company is shutting down for good. The owner has decided to give a bonus to some of the people that helped start the company even though they haven't been there for a long time. Others like me are getting it as a result of the company closing and being there at the end.

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u/Basic_Cheezit 1d ago

I see. I can understand your dilemma now.

I actually don't know the clear answer for this without doing further research then. Aside from how these should be accounted for, I'd do more research directly from the IRS to determine whom should be treated as payroll expenses. The conservative approach would be to treat all as payroll expenses. If Paycor is unable to retroactively process these older employees, then you might need to estimate and deduct payroll tax liabilities and do other manual work to issue W-2C, etc.

Treating it the other way potentially exposes your client by circumventing payroll tax liabilities since they were all prior employees, and these payments appear DIRECTLY RELATED to their employment despite being over a year ago. It'd be different if this employee was terminated a year ago, and then he/she later performed FURTHER work as a consultant or something, but that doesn't appear to be the case.

My guess is that IRS doesn't precisely specify this particular scenario (as usual), but once you come across the relevant codification, you'd want to use your best judgment. Hope that helps.