Austin Tax Blog


If you are about to leave the company or you feel that you have already rendered your service upon submission of your resignation, a compromise agreement takes place between you and your employer.

More often than not, you may have encountered the words compromise agreement from your work or friends. In any case, this article will help you be more informed on compromise agreements and how much each agreement are taxed.

Compromise Agreement

Compromise Agreement

A compromise agreement is a contract between the employer and the employee that produces legal effect upon or after the termination of employment. The statute binds this and this is a form of contract the gives protection both on the rights of the employee and the employer.

The compromise agreement is composed on what the following steps will take on by the employer for the employee to leave the company duly compensated. This mostly includes your severance pay and in exchange you will no longer file for claim of future damages.

Compromise agreement has to be drafted right before or after the employee has rendered his services. Most common incidents that result to drafting compromise agreements are the occurrence of redundancies in the company. Due to the redundancy of the position of the employee, the employer must compensate him for his loss of job.

Therefore, compromise agreement takes place when both the parties has signed the contract where the employee will receive the agreeable amount from the employer and in turn, the employee will waive its right to seek for further claims from his employer.

Tax on Compromise Agreement

Tax on Compromise Agreement

It is important to take note that tax on compromise agreements varies on how the agreement is paid.

For example, if you are paid by your employer from your first day at work up to the last day of rendering your services, your tax deductions will be computed in a standard way. Holidays that are also paid by the employer as included in the compromise agreement are also taxable.

Ex gratia payments are not taxable if the amount stated on the IRS is the same as the amount written in the compromise agreement or even lower.

Payments stated in the compromise agreement resulting to moral damage and injuries are also not considered as taxable. This also applies in cases of death and where such death has resulted heavily on the loss of earnings of the employee.

Termination in cases of redundancy is also not taxable as long as it falls within the amount stated in the policy. If such payment goes beyond the said amount, then it will be taxable.

For pension of the employee, the amount of payment written in the contract must not be subject to tax since such pensions are considered to be a contribution by the employer as benefits for the employees. However, allowance and other monetary benefits may be taxable depending on the amount stated in the agreement.