How is severance pay taxed?
Severance is "supplemental wages" for federal withholding purposes -- the same category as a bonus. Your employer typically withholds a flat 22% for federal income tax (37% on the portion of your combined supplemental wages for the year above $1,000,000), which is a WITHHOLDING rate, not necessarily your actual tax rate -- your real liability depends on your full year's income and is settled when you file.
Is severance pay subject to Social Security and Medicare tax?
Yes, for essentially all ordinary severance. Following United States v. Quality Stores (2014), the IRS (Announcement 2015-8) will disallow FICA refund claims on severance except a narrow carve-out for severance structured specifically as supplemental unemployment benefit (SUB) pay tied to state unemployment compensation. Ordinary severance is Social Security and Medicare wages, same as any other paycheck.
Does my state tax severance pay differently than a bonus?
Most states that publish a flat supplemental withholding rate use the same one for a bonus and for severance. California is a known exception: its EDD publishes a lower 6.6% flat rate for severance, vacation payout, commissions and overtime, distinct from the 10.23% rate used for bonuses and stock compensation -- see the estimate below for that specific case.
Does a lump-sum severance payment get withheld differently than salary continuation?
Possibly, at the withholding-mechanics level -- IRS Publication 15 explicitly names severance pay as supplemental wages, which is what makes the flat rate apply, but that guidance most cleanly fits a lump-sum payment. Severance paid as "salary continuation" at your normal periodic rate is a closer question the underlying Treasury regulation doesn't address head-on, and some employers withhold it through the regular wage tables instead of the flat supplemental rate. Either way, the income itself is fully taxable and FICA-taxable -- only which WITHHOLDING method applies is the open question, not whether tax is owed.
Does severance pay affect unemployment benefits?
This varies significantly by state and by how the severance is characterized (lump sum vs. continued salary) -- some states reduce or delay unemployment benefits during a period covered by severance pay, others do not. This calculator estimates income tax only and does not model unemployment benefit interactions.
