Question: If we are issuing severance pay to an employee, does it have to be taxed?

Answer: Severance pay is considered a taxable compensation and should be run through payroll. If there is a desire to avoid tax implications for the employee, the employer may ‘gross up’ the wages to cover the tax deductions from the committed net severance desired. Since the pay is made as a part of a separate agreement from wages earned, it is a best practice to pay severance on a separate check, especially in cases where regular pay may be due to the employee before the rescission period in the severance agreement has expired.