Quick Answer
Severance pay is compensation given when employment ends, typically 1-4 weeks of salary per year worked. It's taxed as ordinary income at your regular tax rate plus FICA taxes (7.65%), but employers often withhold at the higher supplemental rate of 22% for federal taxes.
Best Answer
Sarah Chen, CPA
Standard employees facing potential layoffs or job changes who need to understand severance basics
What exactly is severance pay?
Severance pay is compensation your employer gives you when your employment ends, usually due to layoffs, downsizing, or company restructuring. It's essentially a financial cushion to help you transition to new employment. Most severance packages range from 1-4 weeks of salary for each year you've worked at the company, though this varies significantly by employer and position level.
How is severance pay taxed?
Severance pay is considered supplemental wages by the IRS, which means it's taxed as ordinary income — just like your regular salary. However, the withholding often feels different because employers typically use the flat supplemental withholding rate.
Here's what gets deducted from your severance:
Example: $75,000 salary, 6 weeks severance
Let's say you earned $75,000 annually and receive 6 weeks of severance pay:
Your take-home is roughly 65% of the gross severance amount.
Key differences from regular paychecks
What you should do
1. Calculate your actual tax liability using our paycheck calculator to see if you're over-withholding
2. Consider timing — if it's late in the year, you might want to defer severance to the next tax year
3. Plan for estimated taxes if you'll be unemployed and won't have regular withholding
4. Review your total annual income to see if the severance pushes you into a higher bracket
Key takeaway: Severance is taxed as regular income but often withheld at 22% federal rate, which may be higher than your actual tax liability — you could get a refund at tax time.
Key Takeaway: Severance pay is taxed as ordinary income with typical withholding around 35% total (22% federal + 7.65% FICA + state taxes), but you may get a refund if the 22% federal rate exceeds your actual tax bracket.
Federal tax withholding on severance vs regular paycheck
| Payment Type | Federal Withholding Method | Typical Rate | Based On |
|---|---|---|---|
| Regular Paycheck | Percentage method | 10-24% | W-4 allowances & salary |
| Severance Pay | Flat supplemental rate | 22% | Fixed IRS rate |
| Large Severance (>$1M) | Highest marginal rate | 37% | IRS requirement |
More Perspectives
Sarah Chen, CPA
Workers with side jobs or multiple income sources who need to understand how severance affects their overall tax situation
How severance affects your multi-job tax situation
If you have multiple jobs, severance pay can significantly impact your tax picture because it's treated as supplemental income on top of your other earnings. The IRS doesn't know about your other income sources when your former employer calculates withholding.
The bracket-jumping risk
With multiple income streams, severance can push you into a higher tax bracket. For example, if your W-2 job pays $45,000 and your side business earns $25,000, you're at $70,000 total income. A $10,000 severance payment brings you to $80,000 — potentially moving some income from the 12% to 22% tax bracket.
Withholding complications
What to do differently
1. Calculate your total projected income including all jobs plus severance
2. Make estimated tax payments if severance withholding isn't enough to cover your liability
3. Adjust W-4s at your remaining jobs to account for the severance income
4. Consider timing — if possible, spread severance across tax years to avoid bracket jumps
Key takeaway: With multiple income sources, severance can create under-withholding problems, so calculate your total tax liability and make estimated payments if needed.
Key Takeaway: Multiple income sources plus severance can push you into higher tax brackets and create under-withholding issues, requiring estimated tax payments to avoid penalties.
Sarah Chen, CPA
Remote employees who may face state tax complications with severance pay
State tax complications for remote workers
As a remote worker, your severance pay might face complex state tax issues, especially if you've moved states during employment or if your employer is in a different state than where you work.
Which state taxes your severance?
Generally, severance is taxed by the state where you performed the work that earned the severance, not necessarily where your employer is located. If you worked remotely from Texas (no income tax) for a California company, your severance typically isn't subject to California state tax.
Multi-state moves
If you moved states during your employment, severance allocation can get complex. Some states prorate based on where you worked during the earning period. This is especially important for high-tax states like California (up to 13.3%) versus no-tax states like Florida.
Withholding vs. actual liability
Your employer might withhold state taxes for their state, not yours. For example:
Action steps for remote workers
1. Verify your tax state for the severance based on where you worked
2. Check withholding to see if your employer withheld the correct state's taxes
3. Plan for multi-state filing if withholding doesn't match your actual tax liability
4. Consider relocation timing — moving to a no-tax state before receiving severance can save thousands
Key takeaway: Remote workers should verify which state can tax their severance pay, as employers often withhold for the wrong state, creating refund opportunities or unexpected tax bills.
Key Takeaway: Remote workers may face state tax withholding for the wrong state on severance pay, often requiring non-resident tax return filings to claim refunds.
Sources
- IRS Publication 15 — Employer's Tax Guide - Supplemental Wages
- IRS Publication 525 — Taxable and Nontaxable Income
Related Questions
Reviewed by Sarah Chen, CPA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.