Tax Implications For Receiving Severance Pay

Receiving Severance Pay

Severance pay is compensation paid to an employee when they leave a job involuntarily or when their employment is terminated for cause. While the amount of severance pay can vary, companies typically offer it to ensure that departing employees have enough income to maintain their standard of living until they find new work. A severance package might include salary, health and dental coverage, paid vacation and sick days, stock options and even the option to keep company equipment like a laptop.

The average severance package is worth about $52,000, according to the Career Transition Institute. This is especially true if the employer has an agreement with a collective bargaining union, which often stipulates the minimum amount of severance pay. Nevertheless, employers can often negotiate with non-unionized employees, especially those with many years of service.

Severance packages can include a week’s salary for every year of service, or even more. Many companies also use a formula, including seniority, job title and length of employment. Some companies may also include unused vacation and sick time. In addition, a bonus that isn’t part of an employee’s base salary can be a significant portion of a severance package, particularly in states where performance-based bonuses are treated as wages.

Tax Implications For Receiving Severance Pay

In many cases, severance pay is taxed the same way as other income. If the employer pays it as a regular paycheck, it will probably be withheld by the payroll department and listed on the W-2 that your former employer sends you for the year in which you received it. In some cases, the employer will allow you to spread out severance pay over several years, which can reduce your overall income tax bill.

If you receive salary calculator Ontario as a lump sum, it’ll likely be included in your gross income for the year that you receive it. However, the IRS will treat it as supplemental wage income, so it may be subject to a flat withholding rate of 22%. If you get severance pay as an ongoing salary, it will likely be subject to the same withholdings you would have on regular wage income. It’s important to meet with a financial advisor who can help you plan for the impact of receiving severance pay and make sure you have sufficient income during your transition.

The severance pay calculator on this page is intended to assist non-unionized employees only. It does not take into account important legal nuances that could significantly affect your entitlements. An experienced employment lawyer can review your specific situation and advise you on your best course of action.

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