Severance Pay

Today TaxMama hears from Jack who asks “I was laid off and received 46 weeks severance pay. My question is this. They deducted more income tax out of this check then they took out for a whole years pay.
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Is there a different tax for severance pay? I think it should be the same as your taxes that are taken out for your regular pay, as severance pay is a salary and not a bonus.”

Dear Jack,

Sorry about your lay-off. I hope you take this opportunity to really do the things you want with your future career.

I know, you didn’t ask. But sometimes, this is exactly the freedom you need to re-think your goals. Some of my friends are really enjoying the new directions they’ve chosen.
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But, back to your question. For your regular payroll checks, your payroll department uses a tax withholding table based on a regular frequency of payment (weekly, semi-monthly, monthly…).
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So, the withholding is spread evenly over the year.

When they pay you in a lump sum like that, they use a different tax table. And it treats the check as if it were the only check you are getting this year – and deducts at the highest rate.

No, it’s not absolutely necessary for them to do this. And some kind employers let your know, in advance. They give you the opportunity to file a new W-4, so you can change your withholding for that one
check to something realistic. Most employers don’t.

The good news, though, is that it’s now almost January. File your tax return quickly and you’ll get that overpayment back right away.

And, remember, you’ll find answers to questions about payroll and all kinds of tax issues, free.
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Where? Where else? At TaxMama.com

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