Are employer provided outplacement services taxable to laid-off workers?

You have been asked to create a program to provide outplacement services to employees who are being laid off. One issue you must coordinate with your payroll department is whether such outplacement services are considered wages subject to employment taxes. If such services will be provided in lieu of higher severance benefits, would the payroll department need to change how it taxes the value of the services?

Generally, the value of employer-provided outplacement services (services designed to help terminated employees find new employment) is not considered wages and may be excluded from an employee's gross income as a working condition fringe benefit.

The exclusion is available if the employer derives a substantial benefit from the services that is distinct from the benefit realized from the payment of additional compensation. Among the substantial business benefits that an employer could derive from providing outplacement services are:

1. presenting a positive image;

2. maintaining employee morale; and

3. decreasing the likelihood of a wrongful termination suit.

If, however, outplacement services are provided in lieu of higher severance benefits, the services constitute wages and are taxable. In addition, the value of outplacement services may not be excluded from gross income if the employee has the option of electing to receive cash or another taxable benefit instead of outplacement services.