Federal law doesn’t require severance pay
The federal Fair Labor Standards Act (FLSA) does not require severance. It is paid under a company policy, employment contract, union agreement or separation agreement, and one to two weeks of pay per year of service is a common formula. A few states do require it in some cases: Maine, for example, requires one week’s pay per year of service for employees with at least three years when a site with 100 or more workers closes or has a mass layoff.
For plant closings and mass layoffs at employers with 100 or more workers, the WARN Act requires 60 days’ written notice. An employer that gives too little notice may owe back pay and benefits for the missing days, up to 60. Some states, including New York and California, have stricter WARN laws of their own.
Severance often comes with an agreement to release legal claims. Workers 40 and older who waive age discrimination claims get a review period by law (usually 21 days, 45 in a group layoff) and 7 days to revoke after signing.
How it is calculated
The IRS treats severance as supplemental wages. When an employer pays it separately from regular wages, federal income tax can be withheld at a flat 22%, which is the method this calculator uses.
Severance = weekly pay (annual base pay ÷ 52) × weeks per year of service × years of service Federal withholding = severance × 22% (37% on supplemental wages above $1,000,000 for the year) Social Security = max(0, min(severance, $184,500 − wages paid this year)) × 6.2% Medicare = severance × 1.45% + 0.9% on the part of the severance that takes this year’s total wages above $200,000 State withholding = severance × the state rate you enter Take-home = severance − total withholding
2026 withholding rules
| Item | 2026 |
|---|---|
| Federal flat rate on supplemental wages | 22% |
| Supplemental wages above $1,000,000 in the year | 37% (mandatory, regardless of W-4) |
| Social Security | 6.2% on wages up to $184,500 |
| Medicare | 1.45%, no cap |
| Additional Medicare | 0.9% on wages above $200,000 |
| State withholding | Varies (some states set a flat supplemental rate) |
IRS Publication 15 (2026). Check your state tax agency for its supplemental withholding rate.
Example: 6 years of service, $78,000 salary
Two weeks of pay per year of service, $60,000 of wages already paid this year and 5% state withholding.
Total withholding is $6,237, about 34.7% of the severance. If this person’s actual federal marginal rate is 12%, part of it comes back at tax time; at 24% or higher, more may be owed. With the calculator’s default 0% state rate, the check is $12,663.
| Item | Amount |
|---|---|
| Weekly pay ($78,000 ÷ 52) | $1,500 |
| Severance ($1,500 × 2 weeks × 6 years) | $18,000 |
| Federal withholding 22% | −$3,960 |
| Social Security 6.2% | −$1,116 |
| Medicare 1.45% | −$261 |
| State withholding 5% | −$900 |
| Take-home | $11,763 |
Things to keep in mind
- Withholding is a prepayment. Your final tax is set when you file Form 1040 with all of the year’s income.
- If your employer pays severance together with regular wages (the aggregate method), it uses the W-4 withholding tables and the amounts will differ.
- Payouts of unused paid time off (PTO) and bonuses are also supplemental wages. Some parts of a settlement, such as damages for physical injury, can be taxed differently.
- Severance can affect when you can collect unemployment benefits, or how much, and the rules differ by state.
- COBRA usually lets you keep your employer health plan for up to 18 months, but you pay the full premium plus up to a 2% administrative fee.
FAQ
Is severance subject to Social Security and Medicare?
Yes. Severance is wages, so FICA applies. If your wages this year have already reached $184,500, no more Social Security tax is due; Medicare has no cap.
Isn’t 22% too much?
22% is a flat withholding rate and may not match your actual rate. If your real rate is lower, you get the difference back when you file; if it’s higher, you owe more.
Would receiving severance next year change my tax?
Payment in a different year changes that year’s total income and brackets, so the total tax can change. Timing is part of your agreement with the employer; review it with a tax professional.
Does the WARN Act cover every layoff?
No. It covers plant closings and mass layoffs above certain sizes at employers with 100 or more workers. It doesn’t cover individual terminations, and state laws may add their own rules.