Losing your job is stressful enough as it is. If you are offered a severance package when let go, your first thought might not be on taxes. However, even severance pay is considered income which means it is taxable. Here we will discuss what you need to know about severance packages and how they affect your taxes.
What Is a Severance Package?
A severance package is a combination of pay and benefits offered to employees after being laid off from an employer. To receive the package, an employee will typically need to sign a severance agreement that details the amount of pay to be received, as well as any benefits that will be offered. The agreement may also list terms that the employee must abide by to receive the package. For example, accepting a severance package could mean that you are not eligible to file a wrongful termination lawsuit or collect unemployment benefits. Severance packages are offered at the employer’s discretion. In other words, employers are not legally obligated to offer a laid off employee any severance pay.
Is Severance Pay Taxable?
Severance pay is taxable, similar to any regular wages or salary income you earned prior to being laid off. Severance pay is taxed in the year of payment and most employers will include your severance pay on your W-2, along with any unused accrued vacation or sick time. Employers will typically withhold federal and state taxes for you, including:
Social Security tax
Medicare tax
Federal income tax withholding
State income tax withholding (if applicable)
Federal unemployment tax (FUTA)
Are There Any Tax Deductions for Job Hunting?
As of the 2017 Tax Cuts and Jobs Act, taxpayers may no longer write off job hunting or moving expenses.
How Does Severance Pay Affect My Taxes?
In some cases, not enough taxes are withheld from severance pay. If this happens, you might owe during tax time. To avoid this, you can confirm your withholding is correct or make an estimated tax payment on the IRS website.
Another scenario can involve a large severance package bumping you up into a higher tax bracket. This could happen because your income is taxed the year it is received. For example, if you receive six months of severance pay at the end of the year, you will essentially receive 18 months’ worth of pay, which could be a drastic increase in income compared to the previous year. This could cause a change in your tax rate and disqualify you from certain credits and deductions.
If you find yourself in the above scenario, there are ways to minimize your tax bill. For example, you can contribute to a tax-deferred retirement account, add funds to a health savings account (HSA), or open a 529 plan for your child’s college fund. You can also ask your employer to have the severance payments spread out to avoid a large tax bill.
Tax Help for Those Who Received Severance Pay
If you were recently laid off and received a severance package, you should make sure enough taxes were withheld. If it’s clear that is not the case, you can still avoid a large tax bill. Your best bet is to speak to a trusted tax professional to avoid a stressful tax issue.
Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
If all goes well during tax season, you file your tax return, get a decent tax refund and wait to do it all again next year. But what happens if you file a return but then notice an error? Do you let it be or file an amended return? If there are simple math errors, the IRS should be able to correct those on their own. However, if you noticed you made an error in your filing status, income, dependents, or credits, you should amend your return through Form 1040-X. Here we will take a look at what happens after you amend your tax return.
How Long Does It Take Amended Returns to Process?
The IRS processes amended returns in the order they receive them. Because of the backlog of unprocessed returns, this could mean waiting longer than usual processing times. According to the IRS website, your amended tax return can take up to 3 weeks after you mail it to show up in the IRS system. From there, it can take more than 20 weeks, instead of up to 16 weeks, to process amended returns. You should not attempt to file a second tax return or call the IRS during this wait period.
You can use the Where’s My Amended Return? (WMAR) IRS online tool to check the status of your return and confirm the IRS has received it. You can also call the toll-free telephone number 866-464-2050. These tools should not be utilized until three weeks after filing the return. This is when status updates may become available.
How to Use the Where’s My Amended Return? Tool
To check the status of your amended tax return, you’ll need your social security number, date of birth, and zip code that is currently on file with the IRS. Once you proceed, you will see one of the following statuses of your return.
Status: Received
The IRS received your amended return and they are processing it. It currently takes more than 20 weeks to complete processing.
Status: Adjusted
An adjustment was made to your IRS account. The adjustment will result in a refund, balance owed or in no tax change. You can make a payment via mail, online, or through the IRS Direct Pay system.
Status: Completed
The IRS finished processing your return. You will receive all the information connected to its processing by mail.
Why Hasn’t My Amended Return Been Processed Yet?
In some cases, the IRS still may not have processed your amended return, even after the 20-week timeline. This can happen for several reasons including:
It has errors
It is incomplete
It is not signed
It is returned to you requesting more information
It includes a Form 8379, Injured Spouse Allocation
It is affected by identity theft or fraud
It is routing to a specialized area
It requires clearance by the bankruptcy area within the IRS
It needs to be reviewed and approved by a revenue officer
It needs a review of an appeal or a requested reconsideration of an IRS decision
In any case, the IRS will contact you if it needs more information to get your amended return processed.
Tax Help for Those Who Amended a Return
You should always ensure that you are filing a complete and accurate tax return so you can avoid filing an amended return. Sometimes amending a return could potentially trigger an audit or other examination by the IRS. If you find that you cannot avoid amending your tax return, make sure to follow the correct steps, provide all necessary information, and be patient while waiting for the IRS to process your return. When in doubt, you can also contact a qualified tax professional for assistance. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
Being your own boss can feel freeing and powerful. However, with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed.
Get Financially Organized
There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including:
Income statements with invoices, receipts, Forms 1099, etc.
Purchase invoices
Receipts for travel, transportation, entertainment, and gifts that are business-related
A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.
Employment tax records
Know Your Responsibilities
You are already responsible for the success of your business. However, you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.
Unfortunately, you won’t have an employer to withhold tax from your self-employed income. That said, you’ll need to make estimated tax payments by each quarterly deadline:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
You should make estimated tax payments if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties.
Take Advantage of Tax Deductions
As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums.
Those who have a business loan or business insurance can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.
Tax Help for the Self-Employed
Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, we can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
