After a layoff
How severance pay is taxed
Severance is ordinary, fully taxable income — there is no special "severance tax break." Because it's paid outside your regular salary, the IRS classifies it as supplemental wages. Employers almost always withhold federal income tax at the flat 22% supplemental rate (38% on amounts over $1 million). FICA — 6.2% Social Security up to the $184,500 cap and 1.45% Medicare — still comes out, and your state takes its cut too.
Will 22% withholding cover it?
Often, yes — if your total income keeps you in the 22% bracket. But if the severance pushes you into the 24% bracket or higher, the flat 22% under-withholds and you'll owe the difference at filing. Conversely, if you're laid off early in the year and have little other income, 22% may over-withhold and you'll get a refund. The calculator compares the flat-22% withholding against your real marginal liability so you know which side you're on.
Smart moves with a severance check
A lump sum lands in one tax year, which can inflate your bracket. If your plan allows, spreading payments across two years, or boosting 401(k) and HSA contributions, can pull taxable income back down. Unemployment benefits you collect are also taxable, so factor those in. To see how the package changes your full-year picture, run the combined number through the paycheck calculator.
Questions
Severance Pay Tax Calculator 2026 FAQ
How is severance pay taxed in 2026?
Severance is ordinary taxable income treated as supplemental wages. Federal income tax is usually withheld at the flat 22% supplemental rate (37% above $1 million), and FICA still applies — 6.2% Social Security up to the $184,500 wage base and 1.45% Medicare — plus any state income tax. There is no special lower rate for severance.
Why is so much tax taken out of my severance?
Because severance is withheld at the 22% flat supplemental rate on top of FICA (7.65%) and state tax, the combined bite can approach 30–40%. If your other income is modest, some of that withholding may come back as a refund; if the package pushes you into a higher bracket, you may owe more at filing.
Does FICA come out of severance pay?
Yes. Severance is wages for payroll-tax purposes, so Social Security (6.2%, up to the $184,500 cap) and Medicare (1.45%) are withheld, just like on a regular paycheck. Only the income-tax portion uses the special 22% supplemental rate; FICA uses its normal rates.
Can I reduce taxes on a severance package?
You can't change that severance is taxable, but you can manage the timing and offset it. Contributing more to a 401(k) or HSA, spreading payments across two tax years where the employer allows, and harvesting investment losses can lower your taxable income for the year the severance lands.
- Sources: IRS Publication 15 (supplemental wages, 22% rate) · IRS Rev. Proc. 2025-32 (2026 brackets) · SSA 2026 wage base $184,500 · State departments of revenue.
- 🔄 Last updated June 27, 2026 · Tax year 2026
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