Why your cheque looks smaller
How severance is taxed — and what comes back.
The amount that hits your account is smaller than the number in the agreement — often by a third or more. Here's why, and why some of it comes back.
Why it shrinks
It's taxed like a bonus.
The IRS treats severance, bonuses and commissions as supplemental wages. Paid as a lump sum, employers usually withhold federal income tax at a flat 22% — 37% on any amount over $1 million. That's withholding: a prepayment, not your final tax bill.
The three bites
flat federal withholding on a lump-sum payout (37% above $1M).
FICA — Social Security (6.2%) and Medicare (1.45%). Severance is subject to it.
state income tax. Nine states take nothing; the rest vary widely.
That 22% is a blunt prepayment — not your final bill.
Why some comes back
If your total income for the year lands you in a lower effective bracket — common when you're out of work for part of it — you over-paid, and the difference comes back as a refund when you file.
The reverse happens too: a large payout on top of a high salary can push you into a higher bracket, and you may owe more in April.
Two ways it's paid
Lump sum
All at once
Withheld at the flat supplemental rate, in one hit. You see the full 22% federal bite up front — and any refund later.
Flat 22% withholding
Salary continuation
Spread on payroll
The company keeps you on payroll, withholding like your regular pay across pay periods. The total tax owed is similar; the timing differs.
Withheld like a paycheck
The bottom line
Take-home now. Settled in April.
The take-home figure is an estimate of what lands now. Your actual tax is settled when you file — the withholding is only a down payment on it.
See your take-home by state →Common questions
Is severance pay taxed?
Yes. Severance is taxable income and a "supplemental wage." A lump sum is usually withheld at a flat 22% federal rate, plus 7.65% FICA and any state income tax.
What is the tax rate on severance pay?
Federal withholding is a flat 22% on a lump sum (37% above $1 million), plus 7.65% for Social Security and Medicare, plus your state rate — which ranges from 0% (nine states) to double digits.
Do you get severance tax back?
Often, yes. The 22% flat withholding is a prepayment. If your total income for the year lands in a lower effective bracket, the difference comes back as a refund when you file.
Run your severance, take-home by state, and runway in about two minutes.
NextClara gives educational estimates only — not legal, tax or financial advice. Check anything consequential with the official source or a licensed professional.