Compensation paid after laid-off -a stumper

Got one that's a stumper.

I head a small non-profit company in Texas. This relates to federal not stae taxes. We laid-off an employee, but kept him on the payroll for an additional time as a severence/vacation pay. During that period we released money to him from a designated account that we were holding as a liabilty. (He was a former employee of a church and that church sent us a designated donation to help pay his wages. If he was terminated before the money ran out, it became his). We paid him from our designated account.

Since he was no longer an employee on the date we paid him, can we issue him a 1099? (Which we did,but have been told we can't because he had not received his final check yet. Can we simply amend the W2 and add the amount (no taxes were taken out) in the "other" box? We've been told that we have to go back and add the amount to his wage amount on thw W2. That creates a huge headache. Your help would be appreciated.

Laymans take:

It seems to me the money was earned or accrued  or quid pro quo in some way due to his employment status and at no time was he an independent contractor?And it was not a gift either!

You may have done it "wrong" way but who is insisting you change it?

BTW, was unemployment compensation an issue?

It was a designated donation tied into his wages, housing,etc. I asked and received a letter from donating church to verify that they wanted whatever was left to be paid to him if he became unemployed.  It was for his "personal support" it was "given to him personally,for his ministry" the letter states that with his unemployment to relaese the funds directly to him to empower him to seek new ministries. He was never an independent contractor. We have an independent auditor driving my comptroller crazy with this. Thanks for your help

If the money was paid out as compensation for his services, including as severance pay, vacation pay, etc., then it is wages and must be included as wages on his W-2. Headache or no, that is the proper treatment. If you are simply releasing to him the rest of the funds in the account because you don't owe him anything more as a result of his employment, that would seem to simply be a gift from the church and would not go on either a W-2 or a 1099.

Yes, we were simply following the churches instructions to give it to him. Their other option was for us to send it back to church. This was not tied to his compensation. Thanks for your anser. I'll talk to auditor this morning armed with your thoughts.

I'm sure that if Taxagent needed to take the opposite view that the payment was NOT a gift but was somehow a quid pro quo tied to employment including the termination of same that its income. And some of your words and letters do not serve you will--don't go there!

But if with a straight face you take the view that the balance of the account  is a gift from its maker to the now EX employee and is NOT tied to any service  as Taxagent also suggests is a possibility, then its a gift--no W-2 or 1099.

Aside, how big of a gift in involved?

We had three possibilities and all were controlled by the gifting church. We could have kept the $20,000 remaining in the account, return to church, or give to employee. I should have just returned it to church,but I gave it to him. Auditor says 403c's can't act as a pass-through with funds and that since we are doing a W2 on him ,we can't do a 1099. We need to include it in our earnings line on his W2 and not in box 14.

It looks like are going that way.

Thanks for your help.