How Severance Pay Is Taxed
You must include severance pay in your income, along with any payment for canceling your employment contract, under IRS Publication 525. Because severance pay counts as wages, it’s taxed much like a regular paycheck. The two main pieces are federal income tax withholding and Social Security and Medicare taxes.
Federal Income Tax Withholding
Withholding is money your employer takes out of your pay and sends to the IRS for you. It’s a prepayment toward the tax you owe for the year.
Severance pay is a supplemental wage, meaning pay outside your regular salary, such as a bonus or commission. The IRS Employer’s Tax Guide gives employers two ways to withhold on supplemental wages. The flat 22% option applies if your employer withheld income tax from your regular wages this year or last year:
- Withhold a flat 22% federal income tax from the severance payment.
- Add the severance to a regular paycheck and withhold using the usual method.
If your supplemental wages top $1 million in a year, employers withhold 37% on the portion over $1 million. The 22% is a withholding rate, while your actual tax depends on your total income for the year. That means the amount withheld may be more or less than what you owe when you file.
FICA Taxes for Social Security and Medicare
FICA is the common name for the Social Security and Medicare taxes taken out of your pay. Severance is subject to both. Here are the 2026 employee rates from IRS Topic 751:
| Tax | 2026 employee rate | What it applies to |
|---|---|---|
| Social Security | 6.2% | Wages up to $184,500 |
| Medicare | 1.45% | All wages, with no limit |
| Additional Medicare Tax | 0.9% | Wages over $200,000 in a calendar year |
The $184,500 Social Security limit applies to your combined wages for the year, including severance and regular pay. Employers withhold the 0.9% Additional Medicare Tax only on wages over $200,000 in a calendar year.
How Severance Shows Up on Your W-2
Since severance is wages, your former employer reports it with your other pay. You should receive a Form W-2 from that employer showing the pay you received during the year. If this is your first time dealing with one, here’s what a W-2 is and how to use it.
Severance Pay vs. Unemployment Benefits
If you collect unemployment after your severance runs out, those benefits are generally taxable at the federal level too. They’re reported differently, though, according to IRS Topic 418:
| Severance pay | Unemployment benefits | |
|---|---|---|
| Federal income tax | Taxable | Generally taxable |
| Tax form you receive | Form W-2 | Form 1099-G |
| Federal income tax withholding | Taken out by your employer | Optional, if you request it |
Because withholding on unemployment is optional, you could owe tax at filing time if you skip it. Read more about taxes on unemployment compensation.
State Taxes on Severance
The federal rules above apply wherever you live, but state income tax rules vary. Check your state tax agency’s website to see how your state treats severance pay.
