Author Topic: Severance paid montly as 1099 and moving states  (Read 322 times)

Jesstache

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Severance paid montly as 1099 and moving states
« on: July 20, 2018, 12:02:54 PM »
I'm trying to decide how our next quarterly estimated tax should be paid.  My husband was fired as a regular W2 employee in December 2017.  In January, he was paid a lump sum severance (W2, tax with held) and they structured the rest as a monthly "consulting fee" to be paid via 1099 for 12 months.  The first was paid in February and it will go through January 2019.  All good, easy to calculate. 

My husband accepted a new job this month and we have moved the whole family to a new state.  Both have state income tax (OR and CA).  His last "consulting" payment was mailed to us in OR July 1st, next one will be mailed to us in CA Aug 1st.  This requires 0 hours of actual work and there will be no actual work performed to earn the $ though they have a "consulting agreement" in place.  In fact, when he applied for unemployment, the company tried to deny it based on his "consulting" income and the unemployment office summarily awarded my husband unemployment as they considered the consulting income to be severance because he's not required to work for it.  I think they did it this way because they're a small-ish company and didn't want to pay it all out at once and maybe are trying to dodge paying employer taxes on it but not my problem, I guess.

Not sure if it's relevant to the situation but we also have 3 rental properties in OR earning us income. 

Long question short: do we pay CA state income tax on the "consulting" income he's receiving while residing in CA or does it all go to OR? 

terran

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Re: Severance paid montly as 1099 and moving states
« Reply #1 on: July 20, 2018, 12:15:20 PM »
States vary, but typically income applies to the the state in which you're a resident when you receive payment. Some states (NY is the one I'm somewhat familiar with) makes claim on income that is either earned OR received while in the state.

Make sure you account for self employment tax: that could be a nasty 15.3% surprise if you're not familiar with it. There may be a way around this since it was severance pay, but if not a 1099 usually counts as self employed income. Looks like you might be able to file form 8919, but that might get your husband's former employer in trouble, so it might depend on how much he wants to rock the boat and what his agreement with the former employer was. 12 months of severance (especially if at full pay) is pretty generous, so maybe not worth pushing back on.

SeattleCPA

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Re: Severance paid montly as 1099 and moving states
« Reply #2 on: July 20, 2018, 12:36:39 PM »
I think the income probably should be sourced to OR since that's where he earned it... and then because you're a CA resident in 2018, it should also be sourced there based on that residency. You should however get a CA credit for the taxes paid to OR on the income.


Jesstache

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Re: Severance paid montly as 1099 and moving states
« Reply #3 on: July 20, 2018, 12:49:58 PM »
So should I send the quarterly estimated tax payments to OR and let the CA taxes come out in the wash (since we'll still be paying some CA tax through his new W2 job) or send them to both and split them between the two states?

Thanks, terran, for the heads up on the self employment taxes.  That would hurt to not account for them but we've got those covered.  I was self employed for several years so knew how to account.  Right now, we basically put half the severance payment in savings for taxes and when we figure the quarterly amount to pay each quarter (because he has also been doing actual, real consulting for other companies), sweep the rest into investments.  So far, it's been about 30% between fed, state and self employment (they with held a ton from the initial lump sum...).  I'll have to calculate again to account for the new job income and whatever taxes they're with holding... and the state split...

I normally do our taxes and have no problem with the rental properties, self employment and other investment items that come up but 2018 might be the year I hire a professional.

terran

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Re: Severance paid montly as 1099 and moving states
« Reply #4 on: July 20, 2018, 01:28:46 PM »
I wouldn't be surprised if CA had similar safe harbor rules with estimated taxes to the federal government in that as long as you pay at least what you owed them last year ($0 in this case) in withholding you won't owe a penalty. That's been my experience with other states, so worth checking on. You'll still want to make sure you've set aside enough to cover the tax bill of course.

BTDretire

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Re: Severance paid montly as 1099 and moving states
« Reply #5 on: July 25, 2018, 08:44:15 PM »
 You might glean something from this,
https://ttlc.intuit.com/questions/3113276-1099-misc-for-severance-pay
In any event you should be able to avoid having to pay both halves of the FICA.

"For some years, there was a controversy in the courts over whether all severance pay should be subject to employment taxes. Arguably, severance pay isnít for services that have been rendered, but for services that will never be rendered. Even so, the IRS position is that any severance pay is subject to employment taxes, and in 2014, the Supreme Court agreed, reversing a key taxpayer win in the Sixth Circuit Court of Appeals. Whatís more, the Court voted 8-0 in favor of the IRS."

Jesstache

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Re: Severance paid montly as 1099 and moving states
« Reply #6 on: July 25, 2018, 10:37:01 PM »
Hmm that is interesting.  Part of the termination agreement was a "consulting agreement" that was worded kind of like a retainer would be for a lawyer.  He's paid a flat consulting fee for 0-10 hours of consulting worked and anything worked over 10 hours per month would be paid out a some ridiculous rate per hour, probably to ensure they were never tempted to do it.   I'm sure the IRS would see this agreement for exactly what it is if flagged, not sure it's in our best interest to rock that boat though...  I think we will pay the proper state quarterly to OR and let it all come out in the wash at tax time... and we'll definitely be hiring a tax professional for my own sanity come tax return prep time.