Severance Pay Calculator

Yes, severance pay is fully taxable as ordinary income. The IRS treats severance the same as regular wages, which means it is subject to federal income tax, Social Security tax (FICA), Medicare tax, and state income tax. Your employer is required to withhold these taxes from your severance check and report the payments on your W-2 at the end of the year. Unlike some other employer payments, there is no special tax exclusion or lower rate that applies to severance — the full amount is included in your gross income for the year you receive it.

There are two IRS-approved methods employers use to calculate federal withholding on severance. The supplemental method applies a flat 22% federal withholding rate directly to your severance amount — this is the most common approach and is easy to predict. The aggregate method combines your severance with your regular wages for the pay period, calculates the withholding on the total, and then subtracts the withholding already applied to regular wages. This can result in a higher effective rate if your combined income pushes you into a higher bracket. Regardless of which method your employer uses, your actual tax liability is settled when you file your annual tax return.

Yes, in most cases severance pay is subject to Social Security (6.2%) and Medicare (1.45%) taxes, just like regular wages. Social Security applies only up to the annual wage base ($176,100 in 2025), so if your regular salary already exceeded that threshold, no additional Social Security is withheld from your severance. Medicare has no wage cap, so 1.45% applies to all severance regardless of income. If your total income (salary + severance) exceeds $200,000 for single filers or $250,000 for married filers, an additional 0.9% Medicare surtax also applies to the excess amount. Note: In some cases where severance is paid under a separate written severance plan that qualifies as 'supplemental unemployment compensation benefits,' courts have debated FICA applicability — but for standard severance packages, FICA applies.

Generally, no. IRS rules require 401(k) contributions to come from 'compensation,' which typically means current wages earned through active employment. Once you are terminated, your active employment has ended, so you generally cannot make new contributions from severance pay. However, your employer's plan may have different rules — some plans allow certain severance payments to be treated as includible compensation, particularly if payments continue during a continuation period where you remain an employee on paper. You should check your plan documents or ask your HR department. If you have other eligible compensation (such as self-employment income), you could potentially contribute to a solo 401(k) or IRA to reduce your overall tax bill, but this is separate from the severance itself.

These are the two most common employer severance formulas. Under the 1-week-per-year formula, an employee who worked 5 years receives 5 weeks of severance pay; under the 2-week-per-year formula, the same employee would receive 10 weeks. More senior employees and higher-level positions often receive 2 weeks per year. Some employers cap total weeks (e.g., 26 weeks maximum regardless of years served). Executive severance packages may be negotiated separately and can be far more generous than standard formulas. Your severance agreement should specify exactly which formula applies, and it is worth reviewing whether your package is competitive with industry norms for your role and tenure.

Yes. Because severance is treated as wages, your employer is required to report it on a W-2 form, just like your regular salary. The severance amount will be included in Box 1 (Wages, tips, other compensation), and the withheld taxes will appear in Boxes 2 (Federal income tax), 4 (Social Security tax), and 6 (Medicare tax). You will receive this W-2 by January 31 of the year following the year you received the severance. If the severance spans two calendar years — for example, you receive installments in December and January — the amounts will appear on separate W-2s for each year. Make sure to include all W-2 income when filing your tax return, as the IRS matches W-2s to returns.