Severance pay is fully taxable: the IRS treats it as supplemental wages, so employers usually withhold a flat 22% for federal income tax (37% on any amount over $1 million), plus the full 7.65% Social Security and Medicare (FICA). On a $40,000 severance, that is about $8,800 federal withholding and roughly $1,160-$3,060 FICA, leaving around $28,000-$30,000 take-home before state tax. Your final tax is reconciled when you file. Use the calculator below to estimate your severance take-home.
Severance is supplemental wages under IRS rules, taxed like a bonus. Employers typically use the percentage method: a flat 22% federal income tax withholding on amounts up to $1 million, and 37% on any portion above $1 million. On top of that, severance is fully subject to Social Security (6.2% up to the $184,500 wage base) and Medicare (1.45%). It is not tax-free and it is not taxed at a special lower rate — the 22% is only a withholding rate, not your final tax.
| Tax on severance | Rate | Notes |
|---|---|---|
| Federal income tax withholding | 22% (37% over $1M) | Percentage (flat) method |
| Social Security | 6.2% | Up to $184,500 combined wages |
| Medicare | 1.45% | No cap; +0.9% over $200,000 |
| State income tax | Varies | 0% in TX/FL/WA and others |
On a $40,000 lump-sum severance under the percentage method, federal withholding is 22% = $8,800. Medicare is $580; Social Security depends on how much of the $184,500 wage base your regular wages already used. If there is room, Social Security adds up to $2,480, so FICA is roughly $1,160-$3,060. Take-home lands around $28,000-$30,000 before state tax. The calculator runs your exact severance, method, and wage base room.
Employers may withhold on severance two ways. The percentage method applies a flat 22% to the severance regardless of your salary. The aggregate method lumps the severance with a regular paycheck and withholds based on your W-4 as if that combined amount were your normal pay — which can withhold more if your salary is high. The calculator lets you compare both. Either way, your actual tax is settled on your return.
No — 22% is a withholding rate, not your final tax rate. When you file, severance is added to your other income and taxed at your real marginal brackets. If your total income puts you below 22%, you may get some of the withholding back as a refund; if you are in a higher bracket, you may owe more. Large severances can push you into a higher bracket for the year, so plan accordingly.
Yes. Unlike some misconceptions, severance is treated as wages for FICA purposes, so it is subject to the full 6.2% Social Security (up to the wage base) and 1.45% Medicare. If your regular wages already hit the $184,500 Social Security cap, the severance escapes the 6.2% Social Security portion but still owes Medicare. The 0.9% additional Medicare tax applies above $200,000 combined.
Severance can come as a single lump sum or as salary continuation (your normal paychecks for a set period). A lump sum is usually withheld via the percentage method (flat 22%); salary continuation is typically withheld like regular wages via your W-4. Salary continuation can spread the income across two tax years, which sometimes lowers the marginal rate — worth considering if you have a choice.
Options are limited but real. Contributing the severance (or part of it) to a traditional 401(k) or IRA, if eligible, can defer income tax. Timing matters too: receiving severance in a year with lower other income (for example, after a layoff with months of no salary) can keep more of it in lower brackets. A tax professional can help structure a large payout.
The calculator covers federal tax and FICA. State income tax also applies to severance in most states (0% in Texas, Florida, Washington, and a few others). Some states require specific withholding on supplemental wages; add your state's rate to estimate net.
Severance and unemployment are taxed differently and can interact. Severance is wages; unemployment benefits are taxable income but not subject to FICA. In some states, receiving severance can delay when you can start collecting unemployment. Check your state's rules so you do not miscount your total taxable income for the year.
Because 22% withholding may not match your true rate, set aside a buffer if you expect to owe, or look forward to a refund if you will be in a lower bracket. The calculator's result is the withheld take-home; your return reconciles the difference. For a large severance, an estimated payment can prevent an underpayment penalty.
Enter your severance amount, choose the percentage or aggregate withholding method, add your regular salary (for the aggregate calculation and the Social Security wage-base room), and select your filing status. The calculator estimates federal withholding, FICA, and your severance take-home. Add state tax separately.
These estimates use the percentage method (flat 22% federal) plus Medicare, assuming Social Security still applies (regular wages under the cap). State tax is extra.
| Severance | Federal (22%) | FICA (approx.) | Take-home |
|---|---|---|---|
| $10,000 | $2,200 | ~$765 | ~$7,035 |
| $25,000 | $5,500 | ~$1,913 | ~$17,587 |
| $40,000 | $8,800 | ~$3,060 | ~$28,140 |
| $75,000 | $16,500 | ~$5,738 | ~$52,762 |
Remember the 22% is withholding, not your final rate — your return reconciles the actual tax. The calculator adjusts for your Social Security wage-base room.
A big lump-sum severance is added to your other income for the year, which can push your top dollars into a higher bracket. For example, a $75,000 severance on top of a partial year of salary may move some income from the 22% into the 24% or 32% bracket. The flat 22% withholding then under-withholds, and you could owe at filing. If you receive severance late in the year after months of unemployment, your total income may actually be lower, leaving you over-withheld and due a refund. Run your full-year picture to know which way it cuts.
If you have a choice, the structure of severance affects taxes and timing. A lump sum gives you the money immediately but concentrates the income (and withholding) in one year. Salary continuation spreads payments — potentially across two tax years — which can keep more income in lower brackets and maintain benefits like health coverage longer. Some packages also let you direct part of the severance into a 401(k). Weigh cash-flow needs against the tax efficiency of spreading the income, and get the terms in writing.
Severance often comes bundled with other taxable items: accrued unused PTO (taxed as supplemental wages), a prorated bonus, COBRA subsidies, and sometimes outplacement services. Most cash components are subject to income-tax withholding and FICA just like the base severance. Stock or equity payouts have their own rules. Review each line of your package so you understand the full taxable amount — the calculator handles the cash severance, but add other taxable payments separately when estimating your total tax for the year.
Severance and unemployment benefits are both taxable income, but only severance owes FICA. In some states, a severance payment delays when you can begin collecting unemployment. Because a layoff can leave you with months of no salary, your total annual income may end up lower than usual — meaning the flat 22% severance withholding could over-withhold, producing a refund. Map your whole year (partial salary + severance + any unemployment + new-job income) to estimate your real tax and avoid surprises. A mid-year layoff often changes your bracket meaningfully.
If your plan permits and timing allows, directing part of a severance into a traditional 401(k) or IRA defers income tax and softens the year's tax hit — especially valuable if the lump sum pushes you into a higher bracket. The trade-off is locking the money away for retirement when you may need cash during a job search. Balance the tax savings against your emergency liquidity. For some, contributing enough to drop a bracket while keeping ample cash on hand is the sweet spot; a financial advisor can help size this for a large payout.
Common myths cause needless worry. "Severance is taxed at 40%" — no, that figure mixes 22% federal withholding, 7.65% FICA, and state tax; your real rate is set on your return. "Severance is tax-free if under a certain amount" — false; all severance is taxable. "Severance does not count for Social Security" — false; it is FICA wages. "You can avoid tax by calling it a settlement" — generally false for ordinary severance. Treat severance as fully taxable supplemental wages and plan accordingly; the calculator estimates the realistic withheld take-home.
Severance is taxed as supplemental wages: employers usually withhold a flat 22% for federal income tax (37% over $1 million) under the percentage method, plus full Social Security (6.2%) and Medicare (1.45%). On a $40,000 severance, take-home is roughly $28,000-$30,000 before state tax.
No. The 22% is only a withholding rate. When you file, severance is added to your other income and taxed at your real marginal brackets, so you may get a refund if you are in a lower bracket or owe more if you are in a higher one.
Yes. Severance is treated as wages for FICA, so it is subject to 6.2% Social Security (up to the $184,500 wage base) and 1.45% Medicare. If your regular wages already hit the Social Security cap, severance still owes Medicare.
The percentage method applies a flat 22% to the severance regardless of salary. The aggregate method lumps severance with a regular paycheck and withholds based on your W-4, which can withhold more for high earners. Your actual tax is settled on your return either way.
You can defer income by contributing eligible severance to a traditional 401(k) or IRA, and timing the payout in a lower-income year keeps more of it in lower brackets. A tax professional can help structure a large payout.
No. People see a flat 22% federal withholding plus 7.65% FICA and sometimes state tax, which can total 30-40% withheld, but that is withholding, not your final rate. Your true tax is calculated on your return based on total income.