Do You Have to Pay Taxes on Your Severance Package in the U.S.?

Do You Have to Pay Taxes on Your Severance Package in the U.S.?


Do You Have to Pay Taxes on Your Severance Package in the U.S.?

If you've been laid off, your employer might offer you a severance package — a lump sum or series of payments to support you after separation. But here's the catch: Will the IRS take a slice of it?

Let’s break it down simply.

✅ Yes, Severance Pay Is Taxable

The IRS treats severance pay as regular income, meaning:

  • Federal income tax applies

  • Social Security and Medicare taxes apply

  • State income tax may apply, depending on where you live

In short: You don’t keep the full amount.

πŸ’‘ How Is It Taxed?

  • Usually, a flat 22% federal withholding is applied (as with bonuses)

  • States may withhold separately

  • It counts toward your total annual income, which could push you into a higher tax bracket

🧾 Severance vs. Unemployment Benefits

Receiving a severance package may:

  • Delay your eligibility for unemployment in some states

  • Reduce your benefit amount temporarily

⚠️ Always report severance pay when applying for unemployment insurance.

✅ Can You Lower the Tax Impact?

  1. Contribute to a Retirement Account (if possible)

    • Some severance may be eligible for a 401(k) rollover

  2. Negotiate the Timing

    • Receiving the payment in the next tax year may lower your taxable income

  3. Use Tax Deductions & Credits

    • Job search expenses, moving costs (if applicable), or healthcare premiums

πŸ“ Conclusion

Yes, severance pay is taxable — just like your regular paycheck.
It’s smart to plan ahead, know how much you’ll actually take home, and explore ways to reduce the tax bite.

If you're unsure, talk to a tax advisor before cashing that check.


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