Taxes on severance pay: withholding, brackets and timing

A severance check feels like a cushion, and for most people it is. The surprise comes later. Payroll withholds a flat percentage, the money goes into savings, and the bill for the rest arrives the following April, when you may still be job hunting. Owing the IRS money while you're out of work is a miserable feeling, and it's one of the easier ones to prevent.

I'm John Schrup, and at FirstSourceTeam we've worked with people through layoffs since 2006. Taxes are rarely the first thing on anyone's mind in the week a job ends, which is exactly why the April bill catches people. This guide shows how the IRS taxes severance, how to check whether the amount withheld will cover what you owe, and why the payment date in your agreement is worth asking about before you sign. Numbers are federal and for 2026.

Severance is wages in the eyes of the IRS. Publication 525 says you must include severance pay in income, along with any payment for the cancellation of an employment contract, and that it's subject to Social Security tax, Medicare tax and income tax withholding. Your employer also pays federal unemployment (FUTA) tax on it.

The Supreme Court settled the payroll-tax question in March 2014. Quality Stores, a retailer in Chapter 11, had paid severance to laid-off staff, withheld FICA, and then sought a refund of $1,000,125 on behalf of itself and about 1,850 former employees, arguing severance wasn't wages. The Court held in United States v. Quality Stores that the payments "are taxable wages for FICA purposes."

One detail catches people out. If you accept a smaller severance so the employer can fund outplacement services instead, Publication 525 says you still include the unreduced amount in income. Publication 15-A treats the reduction as wages for employment tax purposes.

Tax	Rate	Applies to	Paid by
Federal income tax withholding, optional flat method	22%	Supplemental wages up to $1 million a year from one employer, when paid separately from regular wages	Employee
Federal income tax withholding, mandatory rate	37%	Supplemental wages above $1 million in a calendar year	Employee
Social Security tax	6.2% each	Wages up to $184,500 in 2026	Employee and employer
Medicare tax	1.45% each	All wages, no limit	Employee and employer
Additional Medicare Tax withholding	0.9%	Wages above $200,000 paid by one employer in a calendar year	Employee only
FUTA tax	Set by IRS for employers	Severance is FUTA wages	Employer only

Note: Withholding is a prepayment. The income tax owed is set by the brackets on your return. The Additional Medicare Tax owed depends on filing status (IRS Topic 560).

Exhibit 1. Source: IRS Publication 15 (2026), What's New (social security and Medicare taxes for 2026; withholding on supplemental wages), section 7 (Supplemental Wages), section 9 (Additional Medicare Tax withholding), Reminders (Severance payments)

Withholding compared with tax owed

IRS Publication 15 lists severance pay as a supplemental wage, alongside bonuses and commissions. When severance is paid separately from regular salary, and your employer withheld income tax from your pay this year or last, it can withhold a flat 22% with "no other percentage allowed," or it can add the severance to a regular paycheck and withhold on the total. Once your supplemental wages from one employer pass $1 million in a calendar year, withholding on the excess is a mandatory 37%, whatever your Form W-4 says.

If your employer uses the flat rate, it's easy to see 22% taken out and assume the tax is handled. Withholding is a prepayment. The tax itself comes from the brackets on your return, and for a manager laid off in the fourth quarter, the severance sits on top of nine or ten months of salary.

Under the 2026 brackets the IRS published, a single filer pays 24% on taxable income over $105,700, 32% over $201,775 and 35% over $256,225.

Rate	Single: taxable income over	Married filing jointly: taxable income over
10%	$0	$0
12%	$12,400	$24,800
22%	$50,400	$100,800
24%	$105,700	$211,400
32%	$201,775	$403,550
35%	$256,225	$512,450
37%	$640,600	$768,700

Exhibit 2. Source: Internal Revenue Service, 'IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill', Marginal Rates; standard deduction $16,100 single, $32,200 married filing jointly

Take a single filer earning $180,000 a year who is laid off at the end of September 2026, with $135,000 of salary already paid. After the $16,100 standard deduction, the salary alone produces $21,134 of federal income tax. A severance check is then taxed from where the salary left off, which for this person starts in the 24% bracket.

Withheld at 22%Income tax added by the severance

Note: Example: single filer, $180,000 salary, laid off September 30, 2026 with $135,000 of 2026 wages, standard deduction only, no other income. Tax added = tax on salary plus severance minus tax on salary alone. The $180,000 case is rounded down from $52,250.25.

Exhibit 3. Source: Computed from IRS 2026 tax rate schedule and standard deduction (IRS newsroom, tax year 2026 inflation adjustments) and the 22% supplemental withholding rate (IRS Publication 15 (2026), section 7)

At 13 weeks of pay the gap is $900. At 26 weeks the severance adds $22,170 of income tax against $19,800 withheld, a $2,370 shortfall. At a full year of pay, $180,000, part of the check lands in the 32% and 35% brackets, the tax added is $52,250 and the 22% withholding covers $39,600 of it.

Filing status changes the answer. Run the same $90,000 for a married couple filing jointly where this person is the only earner, with the $32,200 joint standard deduction, and the whole severance falls inside the 22% bracket: it adds $19,800 of tax, exactly what was withheld. Add a spouse's salary and part of the check moves up to 24% or higher. The flat rate is the same for everyone; the bracket underneath it is not.

The mistake we see most often is treating the net deposit as money to spend. We suggest clients park the gap between 22% and their own top bracket somewhere they won't touch until the return is filed.

Severance is rarely the only check at the end. Publication 15 lists payments for accumulated sick leave, bonuses and back pay as supplemental wages too, so a final bonus or a sick-leave payout paid in the same month can be withheld at the same flat 22% and stacks on the same brackets.

Covering a withholding shortfall

If the numbers above made your stomach drop, there's still time to fix it inside the year. The IRS charges an underpayment penalty when too little tax is paid during the year, and Publication 505 sets the test. You generally need to pay estimated tax for 2026 if you expect to owe at least $1,000 after withholding and credits, and your withholding and credits will be less than the smaller of 90% of your 2026 tax or 100% of your 2025 tax. If your 2025 adjusted gross income was over $150,000, the second figure is 110% of your 2025 tax.

For many people with a long career and a large severance, the 110% test is the easier one to meet, because last year's tax is already known. Comparing year-to-date withholding against that figure in the month the severance arrives tells you whether an estimated payment is due.

Two other items belong in the same calculation. Unemployment benefits are taxable income, and Publication 525 says you can ask the paying office to withhold 10% by filing Form W-4V. And the 0.9% Additional Medicare Tax applies to wages above $200,000 for single filers and $250,000 for married couples filing jointly, per IRS Topic 560. Employers start withholding it once your wages with them pass $200,000, regardless of filing status, so a joint filer can be over-withheld and a two-earner couple under-withheld.

Severance pay statement

Employer

Northfield Components, Inc.

Pay date

October 15, 2026

Earnings: Severance pay (26 weeks)

$90,000.00

1Federal income tax (supplemental, 22%)

$19,800.00

2Social Security (6.2%)

$3,069.00

Medicare (1.45%)

$1,305.00

3Additional Medicare (0.9%)

$225.00

Net pay

$65,601.00

Year-to-date gross wages

$225,000.00

Year-to-date Social Security wages

$184,500.00

1. 1Flat supplemental rate. Your bracket may be higher.
2. 2Stops at $184,500 of 2026 wages, so only part of this check is taxed.
3. 3Withheld on wages over $200,000 paid by this employer this year.

Lump sum versus salary continuation, and payment timing

The year a payment counts is the year you can get it. Publication 525's rule on constructive receipt says a valid check made available to you before the end of the tax year is income that year, even if you deposit it in January.

That makes the payment schedule in the agreement a tax term. A lump sum in December lands on top of a full year of salary. The same amount in January may land in a year with little other income. Salary continuation spreads the payments over months and often straddles two tax years.

Social Security tax pulls the other way. The 6.2% employee tax stops once your wages for the year reach $184,500 in 2026, and the count resets on January 1. In the example above, the worker had $135,000 of 2026 wages, so only $49,500 of an October severance is taxed for Social Security. Paid in January, the whole $90,000 is.

Tax on the severance	Paid October 2026	Paid January 2027, no other 2027 income
Federal income tax	$22,170	$10,970
Social Security tax (6.2%)	$3,069	$5,580
Medicare tax (1.45%)	$1,305	$1,305
Additional Medicare Tax (0.9%)	$225	$0
Total	$26,769	$17,855

Note: Same example as the previous exhibit: $135,000 of 2026 wages before the severance, so only $49,500 of an October payment is under the 2026 Social Security wage base. As of October 12, 2026, the IRS had not announced 2027 brackets or the 2027 standard deduction, and the Social Security Administration had not announced the 2027 wage base; the January column applies 2026 figures and assumes the 2027 wage base is at least $90,000.

Exhibit 4. Source: Computed from IRS 2026 tax rate schedule and standard deduction (IRS newsroom, tax year 2026 inflation adjustments); IRS Publication 15 (2026), social security wage base $184,500 and Additional Medicare Tax withholding above $200,000

Medicare tax has no wage cap, so the 1.45% is the same in either year. The Additional Medicare Tax drops out of the January case because 2027 wages stay under $200,000. The January payment saves $8,914 in this illustration, but it assumes no other income in 2027. If the same person starts a new job in 2027 at a similar salary, the severance stacks on that pay instead, and the saving shrinks or reverses. As of this writing, the IRS had not announced 2027 brackets and the Social Security Administration had not announced the 2027 wage base, so the table applies 2026 figures to both years.

Your room to move the date is limited, and we'd rather you hear that now than after you've signed. Payment timing is usually set by the employer's plan or by the agreement you sign. Treasury's section 409A regulations exempt separation pay from the deferred compensation rules only within limits: for an involuntary separation, pay up to two times the lesser of your prior-year annual pay or the qualified-plan compensation cap, paid by the end of the second year after the year you leave. A separate rule exempts payments made by the 15th day of the third month after the end of the year the right to them vests. So the time to ask about the payment date is before you sign, while the terms are still open, and the answer will depend on the plan.

Ask for the schedule in writing: the payment dates, whether it's a lump sum or salary continuation, and whether any bonus or leave payout is paid separately. Those three facts, plus your year-to-date pay stub, are enough for a tax preparer to run both years. State income tax on severance follows each state's own rules and isn't covered here.

Working with FirstSourceTeam

When a client brings us a severance agreement, we start with the payment schedule and their last pay stub, so the tax question is on the table before anything is signed. We help you think through the money side, severance terms, benefits and retirement timing, and we send the tax numbers to a tax preparer rather than guessing at them. Alongside that runs the search itself: one-to-one coaching, a rebuilt resume and LinkedIn profile, interview preparation and introductions to recruiters. FirstSourceTeam is a family-owned firm in Minneapolis that has coached job seekers since 2006. The easiest first step is our free one-hour webinar, every Wednesday at 11 AM Central with John Schrup and Misty Schnuelle. The broader guide to the package itself is Severance pay, and negotiating a better package.

Sources

1. Internal Revenue Service, Publication 525 (2025), Taxable and Nontaxable Income, accessed Oct 12, 2026.
2. Supreme Court of the United States (text via Cornell Legal Information Institute), United States v. Quality Stores, Inc., 572 U.S. 141 (2014), No. 12-1408, accessed Oct 12, 2026.
3. Internal Revenue Service, Publication 15 (2026), (Circular E), Employer's Tax Guide, accessed Oct 12, 2026.
4. Internal Revenue Service, Publication 15-A (2026), Employer's Supplemental Tax Guide, accessed Oct 12, 2026.
5. Internal Revenue Service, IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill, accessed Oct 12, 2026.
6. Internal Revenue Service, Topic no. 560, Additional Medicare Tax, accessed Oct 12, 2026.
7. Internal Revenue Service, Publication 505 (2026), Tax Withholding and Estimated Tax, accessed Oct 12, 2026.
8. US Treasury regulations (text via Cornell Legal Information Institute), 26 CFR 1.409A-1, Definitions and covered plans, accessed Oct 12, 2026.