Severance Isn't Guaranteed, and It's Taxed Differently Than Regular Pay
Unlike some countries, the US has no federal law requiring employers to pay severance when they let someone go — it's purely a matter of company policy, an employment contract, or what you negotiate on your way out. When severance is paid, the IRS treats it as a "supplemental wage," and most employers withhold federal income tax on it at a flat 22% (37% on any amount over $1 million in a calendar year) rather than using your regular W-4 withholding. FICA taxes still apply on top of that: 6.2% Social Security up to the annual wage base, and 1.45% Medicare with no cap, plus an extra 0.9% Additional Medicare Tax once your total wages for the year — including the severance — cross $200,000.
| Withholding | Rate |
|---|---|
| Federal income tax | 22% flat (37% over $1M) |
| Social Security | 6.2%, up to annual wage base |
| Medicare | 1.45% (+0.9% over $200,000 total wages) |
This is withholding, not your final tax bill — the actual tax you owe on severance is reconciled with the rest of your income when you file your return, so you could end up owing more or getting a refund depending on your tax bracket. This calculator gives a simplified federal estimate using the 2025 Social Security wage base; state taxes, employer withholding method choices, and your specific W-4 elections can change the actual amount withheld. Confirm the details with your employer's payroll department.
Frequently Asked Questions
No, it's not required by federal law — it depends on company policy, contract terms, or a negotiated agreement.
The IRS classifies it as a supplemental wage, and employers commonly withhold federal tax at a flat 22% rather than using regular payroll withholding tables.
No, it's just withholding — your actual liability is settled when you file your tax return.
※ Estimate only. Verify current-year wage base and consult your payroll department or a tax professional.