Severance pay is usually calculated with a simple formula: your weekly base pay multiplied by your years of service, using a multiplier of one or two weeks per year. What you actually deposit is smaller. Federal income tax withholding on severance is typically a flat 22%, and Social Security (6.2%) and Medicare (1.45%) come out on top of that, so a $15,000 gross package often nets somewhere around $9,500 to $10,500 after state tax. How severance pay is calculated depends on the multiplier your employer uses, whether the agreement caps total weeks, and how your pay is structured if you don’t earn a fixed salary.
The Base Formula: Weeks of Pay Times Years of Service
Convert your annual salary to a weekly rate, then multiply by the number of years you worked at the company. One week of pay per year of service is the most common multiplier. Two weeks per year shows up more often for senior roles and long-tenured employees.
Someone earning $78,000 a year has a weekly rate of $1,500. Ten years of service at one week per year produces $15,000 gross. At two weeks per year, the same employee walks away with $30,000 before taxes. The formula rewards tenure, which is the point — it’s meant to compensate for the difficulty of replacing a long stretch at one company.
Watch for caps. Many agreements limit the total payout to a set number of weeks no matter how long you worked. A 26-week cap means someone with 30 years of service receives the same gross amount as someone with 26. Caps are especially common in large restructurings where the company has budgeted a fixed layoff pool. Read the separation agreement carefully before assuming your years of service translate dollar-for-dollar.
Hourly and Variable-Pay Workers
If you don’t earn a fixed salary, the starting figure changes. Hourly employees are usually calculated at their most recent hourly rate times a standard 40-hour week. Someone earning $25 an hour gets a $1,000 weekly rate for severance purposes, even if their actual schedule varied.
Commission-heavy and bonus-heavy roles need a different starting point because any single pay period could be an outlier. Employers often look back at the previous 6 to 12 months of total earnings and calculate an average weekly rate. Private employers aren’t bound to a specific look-back window, but many use one to smooth out seasonal swings.
Accrued Vacation Is Usually Separate
Unused vacation almost always gets paid out as a distinct line item on your final paycheck, not folded into the severance calculation. Whether your employer must pay out unused PTO depends on your state’s labor laws and company policy. If someone quotes you a severance figure that seems higher than the formula suggests, ask whether it already includes accrued leave.
Is Severance Required?
Almost never. The Fair Labor Standards Act does not require severance pay; it’s a matter of agreement between you and your employer, or between your employer and a union representing you.1U.S. Department of Labor. Severance Pay That agreement might live in your offer letter, an individual employment contract, the employee handbook, or a collective bargaining agreement. If none of those promise anything, your employer can let you go with only a final paycheck for hours already worked.
The main exception is the federal Worker Adjustment and Retraining Notification Act, which requires employers with 100 or more full-time employees to give at least 60 calendar days’ written notice before a mass layoff or plant closing.2Office of the Law Revision Counsel. 29 USC 2101 If they skip notice, they owe affected workers back pay and benefits for the violation period, up to 60 days.3Office of the Law Revision Counsel. 29 USC 2104 That isn’t technically severance, but it functions similarly.
Federal Income Tax Withholding on Severance
The IRS classifies severance as supplemental wages, not regular income.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: Supplemental Wages That gives your employer two withholding options for federal income tax.
The flat 22% method is the more common one. Your employer withholds 22% of the entire severance payment regardless of your tax bracket. It’s simple, and it’s what most payroll systems default to.
The aggregate method combines the severance with your most recent regular paycheck and withholds on the total as if it were one regular pay period, then subtracts the tax already withheld from the regular portion. Depending on your income, this can produce higher or lower withholding than the flat rate.
If your total supplemental wages from the same employer exceed $1 million in a calendar year, everything above that threshold is withheld at 37%.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide – Section: Supplemental Wages Rare, but relevant for executive packages.
The withholding rate is not your actual tax rate. If 22% was withheld but your effective rate ends up at 12%, you’ll get the difference back at filing. In the 32% bracket, you’ll owe more. Withholding is an estimate; your real bill depends on your total income for the year, filing status, and deductions.
Payroll Taxes: Social Security, Medicare, and the Wage Base
Severance is subject to the same payroll taxes as regular pay. For 2026, that’s 6.2% for Social Security and 1.45% for Medicare.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Social Security tax only applies to the first $184,500 of combined wages and severance in 2026.6Social Security Administration. Contribution and Benefit Base If you earned $170,000 in regular salary before your layoff and received a $30,000 severance payment, only $14,500 of the severance would be hit with the 6.2% Social Security tax. The remaining $15,500 still gets Medicare tax but not Social Security.
The Additional Medicare Tax adds another 0.9% on combined wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly.7Internal Revenue Service. Topic No. 560, Additional Medicare Tax Your employer withholds this once your wages from that employer cross $200,000, regardless of filing status. Any adjustment happens on your return.
A Sample Gross-to-Net Breakdown
Here’s what the math looks like on the $15,000 example, assuming the employee hasn’t hit the Social Security wage base and the employer uses the flat 22% method:
- Gross severance: $15,000
- Federal income tax withholding (22%): −$3,300
- Social Security (6.2%): −$930
- Medicare (1.45%): −$217.50
- Approximate net before state taxes: $10,552.50
State income taxes carve out more, with rates varying widely. After state withholding, that $15,000 package might deposit somewhere around $9,500 to $10,500. The gap between the promised number and the deposited number catches people off guard. It’s the same set of deductions that shrink every paycheck, applied to a single lump sum.
Other Deductions That Can Reduce the Payout
A few non-tax items can also come off the top.
COBRA premiums may be deducted from your severance if the employer agrees to cover continuation health coverage as part of the package. COBRA allows the plan to charge up to 102% of the full plan cost — the portion you paid as an employee plus the portion your employer subsidized, plus a 2% administrative fee.8U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers That’s often two to four times what you were paying out of pocket while employed.
Outstanding loans or advances — salary advances, relocation packages, tuition reimbursement — may be offset against your severance. Whether the employer can do this without your written consent depends on state wage deduction law.
Unreturned company property (laptops, phones, equipment) can sometimes be charged against your payout, though many states require your written authorization before deductions for property.
What You Sign Away in Return
Severance rarely comes without strings. Your employer will almost certainly ask you to sign a release of claims waiving your right to sue for wrongful termination, discrimination, retaliation, and similar causes of action.9U.S. Equal Employment Opportunity Commission. Q and A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements The release typically covers federal statutes including the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, and the Americans with Disabilities Act, along with state law counterparts.
Extra Protections If You’re 40 or Older
The Older Workers Benefit Protection Act requires that any waiver of age-discrimination claims give you at least 21 days to review the agreement for an individual layoff, or 45 days if the severance is part of a group layoff or exit incentive program.10Office of the Law Revision Counsel. 29 USC 626 The agreement must be in plain language, specifically reference your ADEA rights, and advise you in writing to consult an attorney.
After you sign, you have a 7-day revocation period that cannot be shortened or waived.9U.S. Equal Employment Opportunity Commission. Q and A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements The agreement doesn’t become enforceable until the eighth day after signing. If the employer pressures you to sign early or offers different terms to workers who sign faster, the waiver may be invalid.11eCFR. 29 CFR 1625.22 – Waivers of Rights and Claims Under the ADEA
Lump Sum or Salary Continuation?
Some employers give you a choice between a single lump sum and salary continuation over several pay periods. Tax treatment is identical either way. Practical effects differ.
A lump sum drops the full gross amount into one paycheck, so the flat 22% applies to the whole payment at once. If the aggregate method is used, combining that lump sum with a final regular paycheck can temporarily push you into a higher withholding bracket even if your annual rate is lower. You reconcile at filing, but the cash-flow hit stings.
Salary continuation keeps you on the payroll cycle, which may preserve employer-subsidized health coverage longer and smooth the transition. It can also delay unemployment benefits in states that treat ongoing salary payments as disqualifying income.
How Severance Affects Unemployment
Whether severance delays or reduces unemployment benefits depends entirely on your state. Some states ignore a lump-sum payment and let you collect immediately. Others allocate the severance across weeks (dividing the gross by your weekly pay rate) and suspend benefits for that many weeks. A few reduce your weekly benefit dollar-for-dollar during the allocation period.
The structure matters. Salary continuation, where you remain on payroll, is more likely to delay benefits than a one-time lump sum offered in exchange for a release. Check your state unemployment agency’s rules before signing. The difference can be worth thousands.
401(k) and Retirement Consequences
You cannot defer severance into a 401(k). Even though severance is taxable wages, once you’ve separated from the employer you’re no longer eligible to make elective deferrals.12Internal Revenue Service. Chapter 3 – Compensation The full severance amount hits your taxable income for the year with no 401(k) shelter available.
If you have an outstanding 401(k) loan when you leave, it becomes urgent. When the unpaid balance is treated as a plan loan offset because of your separation, you have until the due date of your federal tax return (including extensions) for that year to roll the offset amount into an IRA or another qualified plan.13Internal Revenue Service. Retirement Plans FAQs Regarding Loans Miss the deadline and the balance is treated as a taxable distribution, with income tax and a 10% early withdrawal penalty if you’re under 59½. It’s one of the quieter financial traps of a layoff — people focus on the severance check and forget about the loan ticking in the background.