How do severance packages get taxed

Providing severance pay is not required by law, and it may be negotiated between the employer and employee. You can ask for a greater amount of severance pay than what the employer initially offers, and they may or may not be willing to comply. Your severance is often based on the length of time you have spent at the company. Depending on the company, a severance package may include other perks in addition to pay, such as:.

Severance pay usually is not the same thing as your final paycheck. Your final paycheck may include other pay in addition to severance pay. This money is taken from each paycheck and withheld for the taxes paid in April. There will be one deduction for federal income tax and, depending on where you live, another for state income tax. You can expect to pay the same percentage of withholding on your severance pay as on your regular wages.

You will pay a total of 7. Within state guidelines, companies can set their own policies on when they issue your final paycheck.

Your final paycheck is different than your severance pay. Your final check may include some or all of the following, all of which will be taxed:. Elective premiums. Retirement fund contributions. Money owed to the company. The type of payment received will also have an impact on the unemployment benefits.

Severance payments made to an employee in exchange for a release of claims or in recognition for past service may either delay the receipt of benefits or have no impact at all. On the other hand, payments made as salary continuation assigned to a specified period of time or in lieu of notice will likely delay or reduce the unemployment benefits that the employee will receive.

Another factor to consider is whether the severance payment is unilaterally offered as part of company policy. In such a circumstance, these payments may disqualify an employee from unemployment.

However, if severance is negotiated on a case-by-case basis, it would likely not affect eligibility for unemployment. From a tax perspective, the IRS views traditional severance payments as supplemental wages because they are not a payment for services. Severance paid to employees in a lump sum, unrelated to state unemployment benefits, is taxable as wages for both income-tax withholding and FICA purposes.

Therefore, the employer may choose to use either the optional flat rate withholding or to use the aggregate method. Using the aggregate method, the employer would add the supplemental wages to regular wages and calculate the total amount as regular wages. From an employee's perspective, it may be beneficial to receive the payments up front if an employee is able to direct them into a tax-favored investment such as an IRA. Employers should review the state unemployment regulations to determine the impact their severance payments may have on employee unemployment eligibility.

If they do not affect eligibility, then it may be more cost beneficial to make these payment in a lump sum rather than incurring a processing fee over several additional pay periods. Pay raises in the U. You may be trying to access this site from a secured browser on the server.

Please enable scripts and reload this page. Table of Contents. What Is Severance Pay? Is Severance Pay Taxable? By Joshua Wiesenfeld. Joshua Wiesenfeld is a financial investigator, certified public accountant CPA , and certified fraud examiner CFE with almost a decade of experience.

He writes about taxes and investing and has been published in the Journal of Accountancy and Fraud Magazine. Joshua has a master's of public administration in forensic accounting from John Jay College. Learn about our editorial policies. Reviewed by Ebony J. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.

Learn about our Financial Review Board. Fact checked by Emily Ernsberger. Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information.

Staggered payments also can lower your tax bracket and ultimate tax rate. Article Sources. Your Privacy Rights. To change or withdraw your consent choices for TheBalance. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.