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Taxability of Legal Fee reimbursement

edited November 2010 in General Payroll Topics
Good morning, everyone...I'm hoping to get some help or direction on this question: we recently had a layoff which included the CFO. Part of his separation package included an adendum from a recapitolization that occured last year...this gave him a little extra attention in his severance pacakge.
He has incurred legal fees to confirm that the agreement from the recapitolization was handled properly...timing of additional bonus payments, the amounts, etc.

In that agreement is the following sentence: "The Company shall pay your reasonable and documented attorney’s fees and disbursements incurred by you in connection with the negotiation of this Letter Agreement; up to a maximum of $5,000."

We have recently cut a check to him for the $5000 and I'm researching if this payment should be grossed up and reported on his W-2 or if it might be reasonable to handle like a reimbursement (similar to how travel expenses are handled).

If anyone has some suggestions as to web sites I can gather more information that'd be really helpful...let me know if you need more information in order to point me in the right direction.
Thanks so much! MassPR


  • I'm not sure this is a "employee business expense" in that it does not look like an ordinary and necessary expense incurred in carrying out the employer's business. It may well be deductible by the employee to the extent that it relates to the employee's income and tax situation. That is, the employer is not normally obligated to pay another person's legal fees. I'm thinking it is wages.
  • Thanks, Patrick...that's what I was thinking as well...I'll see what I can find maybe on the IRS manager might want to see regulations of some kind. If you have any suggestions as to where I can look, it would be appreicated.
  • We keep getting asked to prove the negative -
    Everything paid to or for an employee is compensation unless it is specifically excluded - I am not aware of a specific exclusion for paying the attorney fees incurred by an employee to have the attorney represent the employee in negotiations with the company.

    That I am not aware of a specific exemption does not mean there is not one - but it does mean that I am not going to be able to give a citation for something that I am not aware does not not exist. :?

    My reasoning - if the company hired the attorney to review the documents to make sure the agreement was what the parties intended without being an advocate for either party, and, for convenience, the employee paid he attorney, then the employee should be reimbursed and the reimbursement should be excluded from gross income.

    If the attorney is serving as the employee's advocate in the negotiations, then it is the employee's expense (just as the company attorney is the company's expense) and the amount of the reimbursement is wages.