Buyouts and Early Retirement Packages: Are They Considered Taxable Income?

Sometimes, a company will decide that it is in their best interests to relocate to another state or country. Unfortunately in this event, it often means that some employees will not be along for the ride and they’ll be forced to find other employment. However, this could open the door to the employer offering an employee either a buyout or an early retirement package.

A buyout is typically offered to younger employees who will most likely be searching for another job, but need some liquid assets while searching for a new employer. Early retirement packages are more often offered to older workers that are leaning towards retirement. How much an employee is set to receive can depend on a lot of factors such as time spent with the company, accrued sick/vacation days, or whether the employer holds the employee in high regards.

These voluntary separation incentive payments are considered supplemental wages, therefore, they are treated similarly to cash awards and bonuses. As a result, the payments are treated as gross income and are taxable in the tax year in which the payouts are received. Often times, the taxes are withheld before the former employee receives the payment; sometimes a company will include an added amount in an effort to help cover the taxes to be paid. But be aware, while the added amount seems like a good gesture, it could come back to haunt you in the end if it bumps you up into a new tax bracket. Before taking a buyout or early retirement package, make sure to review how it will affect you and your tax burden. It may be more beneficial to seek another option.