Quick Answer
Severance pay is taxed as ordinary income at your regular tax rates, plus 6.2% Social Security tax and 1.45% Medicare tax. On a $50,000 severance, expect to lose roughly $18,000-25,000 to federal, state, and payroll taxes depending on your bracket.
Best Answer
Robert Kim, CPA
Best for employees receiving standard severance packages who want to understand the full tax impact
Severance pay is fully taxable income
Severance pay is treated exactly like regular wages for tax purposes. According to IRS Publication 15-A, it's subject to federal income tax, state income tax (where applicable), Social Security tax (6.2%), and Medicare tax (1.45%). There's no special tax treatment or reduction.
Tax calculation on severance pay
Let's break down the taxes on a $50,000 severance package for someone normally earning $75,000 (22% federal bracket):
Federal income tax:
Payroll taxes:
State tax (assume 5%): $2,500
Total tax hit: ~$17,325-19,325 on $50,000 severance
Severance tax rates by income level
*Marginal rate varies as severance pushes income across brackets
Withholding complications
Employers often use "supplemental wage" withholding rates on severance:
Per IRS Publication 15, this withholding might not match your actual tax liability. If you're normally in a lower bracket, you may get a refund. If you're in a higher bracket, you might owe more.
Timing strategies to reduce taxes
Spread payments across tax years: If possible, negotiate severance payments in January rather than December to avoid bunching income.
Maximize deductions in severance year:
Health insurance deductions: COBRA premiums may be deductible if you itemize, and you might qualify for premium tax credits if income drops significantly.
Special severance situations
Stock options or restricted stock: May have different timing rules and tax treatment
Non-compete payments: Generally taxable as ordinary income
Legal settlement portions: Some may be excludable from income depending on the nature of claims
Outplacement services: Usually not taxable to you as income
According to IRC Section 3401(a), severance is subject to income tax withholding, but some fringe benefits included in severance packages may have different treatment.
What you should do
When you receive severance:
1. Calculate estimated taxes using the IRS Tax Withholding Estimator
2. Make quarterly payments if withholding won't cover your liability
3. Consider tax-loss harvesting if you have investment accounts
4. Plan deductions strategically for the tax year you receive severance
Use our refund estimator to see if your severance withholding will result in a refund or additional tax owed.
Key takeaway: Severance pay faces the same tax rates as regular income plus 7.65% payroll taxes, typically reducing a $50,000 package to $31,000-35,000 after all taxes.
*Sources: [IRS Publication 15-A](https://www.irs.gov/pub/irs-pdf/p15a.pdf), [IRC Section 3401](https://www.law.cornell.edu/uscode/text/26/3401)*
Key Takeaway: Severance pay faces regular income tax rates plus 7.65% payroll taxes, typically reducing a $50,000 package to $31,000-35,000 after taxes.
Tax rates on severance pay by income level
| Regular Salary | $25K Severance Tax | $50K Severance Tax | $75K Severance Tax |
|---|---|---|---|
| $40,000 | ~$8,750 (35%) | ~$19,000 (38%) | ~$31,500 (42%) |
| $60,000 | ~$9,250 (37%) | ~$19,000 (38%) | ~$31,500 (42%) |
| $80,000 | ~$9,750 (39%) | ~$20,000 (40%) | ~$33,000 (44%) |
| $100,000 | ~$10,500 (42%) | ~$21,000 (42%) | ~$33,750 (45%) |
More Perspectives
Diana Flores, EA
Best for employees who received severance after relocating and may face multi-state tax issues
Multi-state severance tax complications
If you moved states during or after your job loss, severance taxation gets more complex. The key question is: which state gets to tax your severance?
Generally, severance is taxed by the state where you performed the work that earned it, not necessarily where you live when you receive it.
Common multi-state scenarios
Scenario 1: Worked in New York, moved to Florida, received severance
Scenario 2: Worked remotely from home, company in different state
According to state tax authorities, you may need to apportion severance income if you worked in multiple states during your final year. Keep detailed records of where you worked and when you moved.
What documentation you need
For multi-state severance situations:
Key takeaway: Multi-state moves can create double taxation risks on severance — the work state may tax it even if you've moved to a no-tax state.
Key Takeaway: Multi-state moves can create double taxation risks on severance — the work state may tax it even after you move.
Diana Flores, EA
Best for younger workers receiving their first severance who want to minimize tax impact
Lower tax rates can work in your favor
Early-career severance often gets taxed at relatively low rates because your total income is lower. A $20,000 severance when you normally earn $45,000 faces different tax treatment than the same severance for a $100,000 earner.
Smart moves for young professionals
Use the severance year for Roth conversions: If you're unemployed for part of the year, your income might be lower than normal. This is a great time to convert traditional IRA money to Roth at low tax rates.
Consider estimated tax payments: Since you don't have ongoing payroll withholding after job loss, you might need to make quarterly payments on the severance. Use Form 1040-ES to calculate payments.
Maximize job search deductions: While most job search expenses aren't deductible anymore under current law, moving expenses for your first job might qualify in limited circumstances.
Health insurance planning: You might qualify for premium tax credits on healthcare.gov if your income drops significantly after the severance year.
Per IRS rules, the standard deduction for 2026 is $15,000 (single), so smaller severance amounts get some protection from this large deduction.
Key takeaway: Early-career severance often faces lower tax rates due to smaller amounts and lower total income — take advantage with strategic Roth conversions.
Key Takeaway: Early-career severance faces lower tax rates due to smaller amounts — use this opportunity for strategic Roth conversions.
Sources
- IRS Publication 15-A — Employer's Supplemental Tax Guide
- IRC Section 3401 — Definitions for income tax withholding
Related Questions
Reviewed by Robert Kim, CPA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.