Severance pay is money and benefits an employer offers when it ends your job, meant to bridge you to your next paycheck. No federal law forces an employer to provide it. Whether you get anything, and how much, comes down to company policy, your contract, and what you negotiate before signing the release the employer will almost certainly put in front of you. The cash is only part of the picture. Health coverage, taxes, unemployment eligibility, and the legal rights you give up all shape what the offer is actually worth.
What’s Usually in the Package
A severance offer is a bundle. The cash payment is the headline, but the other pieces often carry real dollar value.
- Cash payment, typically calculated as a multiple of your weekly or monthly salary.
- Health insurance continuation. Many employers subsidize your premiums for three to six months. Even without a subsidy, COBRA lets you keep your employer’s group plan for up to 18 months, though you pay the full premium plus a 2% administrative fee. When the employer pays COBRA premiums for you, those payments are not taxable income.
- Payout of accrued but unused vacation and sick time. Some states require this regardless of severance.
- Outplacement services: career coaching, resume help, and job-search support through a third-party firm. Bought on your own, these can run several thousand dollars.
- Dental and vision coverage, sometimes bundled with medical continuation.
One thing severance generally can’t do: fund your 401(k). Because severance is paid after you separate, IRS rules exclude it from eligible compensation for plan deferrals.
How the Amount Gets Calculated
There’s no single formula. The most common approach ties the payout to years of service, usually one to two weeks of base salary per year worked. Someone with eight years might see eight to sixteen weeks. Entry-level employees often receive a flat two weeks regardless of tenure. Mid-level managers tend to land in between. Senior executives routinely negotiate six months to a full year of pay, reflecting how long comparable roles take to find at that level.
None of this is legally required. These are conventions that vary by industry and company. If your compensation includes significant bonus pay, ask whether the calculation uses base salary alone or a figure that reflects your actual earnings; the difference can be substantial.
If you hold unvested stock options or restricted stock units, check whether the agreement accelerates vesting on termination. Acceleration is more common at tech companies and after acquisitions, and the value at stake can dwarf the cash portion of the offer.
What You Give Up by Signing
Almost no employer pays severance without a signed agreement in return. The core trade is straightforward: the company pays you, and you release your right to sue over anything connected to your employment or termination. That release typically covers wrongful termination, discrimination, harassment, and unpaid wage claims.1U.S. Equal Employment Opportunity Commission. Q&A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements
Restrictive covenants come along with the release. Non-disclosure clauses bar you from sharing confidential information. Non-disparagement clauses restrict what you can say about the company. Non-solicitation clauses stop you from recruiting former colleagues or approaching company clients. Some agreements add non-compete language limiting where you can work next, though enforceability of non-competes varies widely by state. Violate any of these and clawback provisions can force you to return the money.
Read these terms as carefully as the dollar figure. A generous check paired with a broad non-compete may be worth less than a smaller check with no such restriction.
If You’re 40 or Older
The Older Workers Benefit Protection Act gives workers 40 and above specific review rights. For an individual termination, the employer must give you at least 21 days to review the agreement before signing. For a group layoff or exit-incentive program, that stretches to 45 days.2Office of the Law Revision Counsel. 29 U.S. Code 626 – Recordkeeping, Investigation, and Enforcement After signing, you have a 7-day window to revoke the agreement, and no employer can shorten it.3U.S. Equal Employment Opportunity Commission. Waivers and Claims Under the ADEA 29 CFR 1625.22
The agreement must be written in plain language, specifically reference your Age Discrimination in Employment Act rights, advise you in writing to consult an attorney, and provide something of value beyond what you were already owed. Miss any of those, and the age-discrimination waiver may be unenforceable.2Office of the Law Revision Counsel. 29 U.S. Code 626 – Recordkeeping, Investigation, and Enforcement Workers under 40 don’t get these statutory protections, but a court can still void a release signed under duress or without a fair chance to review it.
How Severance Is Taxed
The IRS treats severance as ordinary income. It’s subject to federal income tax withholding, Social Security, Medicare, and federal unemployment tax, the same as regular wages, and it shows up on a W-2, not a 1099.4Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
Withholding works a little differently because severance counts as a supplemental wage. Employers withhold a flat 22% for federal income tax rather than following your W-4. If your total supplemental wages for the year top $1 million, everything above that threshold is withheld at 37%.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Social Security tax at 6.2% applies up to the 2026 wage base of $184,500, and Medicare’s 1.45% applies with no cap.6Social Security Administration. Contribution and Benefit Base
How the money arrives also matters. A lump sum puts everything in one tax year and can push you into a higher bracket. Salary continuation spreads the income across pay periods and can soften the bracket hit, but ties your payout to the employer’s continued solvency. If the company files for bankruptcy mid-schedule, you may lose the unpaid balance. When there’s any doubt about the employer’s financial footing, the lump sum is the safer choice.
Severance and Unemployment Benefits
Whether severance affects unemployment eligibility depends entirely on your state. There’s no federal rule. Some states disqualify you from collecting benefits during the weeks your severance covers. Others let you collect both without penalty. Still others distinguish by structure: a lump sum paid more than 30 days after your last day may not affect eligibility, while weekly severance payments above your benefit rate could reduce or delay checks.
File for unemployment right after losing your job even if you received severance. The state agency will sort out whether benefits are offset. Waiting until the severance runs out can cost you eligible weeks in states that wouldn’t have reduced anything. If your severance agreement includes language stating the employer won’t contest your unemployment claim, that helps.
Negotiating the Offer
The first offer is rarely the final one. Employers typically expect some back-and-forth, especially for mid-level and senior employees. Places where people commonly leave value on the table:
- Cash amount. If the formula doesn’t match a realistic job-search timeline, ask for more. Your leverage grows with tenure, specialized knowledge, and the strength of any legal claims you’d be releasing.
- Health coverage duration. Extending employer-paid COBRA is tax-efficient because those premiums aren’t taxable to you, so an extra few months of coverage beats an equivalent cash bump.7Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits
- Reference letter. Getting agreement in writing on what the company will tell future employers removes a common source of anxiety.
- Non-compete scope. Push to narrow the geography, shorten the term, or strike the clause. Employers often soften these rather than risk losing the release.
- Outplacement services. Ask if they’re not included. They cost the company relatively little and can materially help your search.
- Equity acceleration. If you hold unvested stock, request partial or full vesting, especially after an acquisition.
If the employer presses you to sign quickly, push back. Workers 40 and older are entitled to at least 21 days to review, and material changes during that period restart the clock.1U.S. Equal Employment Opportunity Commission. Q&A – Understanding Waivers of Discrimination Claims in Employee Severance Agreements Even under 40, asking in writing for more time is standard.
When To Bring in an Attorney
Having an employment lawyer review the agreement before you sign is almost always worth a one- to two-hour consultation fee. A lawyer will flag one-sided terms, assess whether legal claims you’d be releasing are worth more than the severance offer, and identify clauses that may be unenforceable in your state. The agreement itself will tell you to consult an attorney. That language is required for age-related waivers under the OWBPA, and most employers include it either way. Take it at face value. The document was written to protect the company; you deserve someone reading it whose job is to protect you.