While the check provides a crucial financial cushion during a period of transition, it often arrives with a significant surprise: a large tax bill. Unlike federal rules which provide a flat rate, state tax treatment of severance varies significantly.
Why Severance Payment Puts You at Higher Bracket Risk
Strategies to Manage the Tax Impact Employees receiving severance do have options to manage the immediate tax burden, though they require careful planning. State Tax Implications The financial impact becomes even more pronounced when state taxes are applied.
Unlike a regular paycheck that covers salary for hours worked, severance is viewed as a substitute for wages and, in most cases, is considered supplemental wage income. One common strategy is to roll the severance into the final payroll alongside the last regular paycheck.
Why Severance Payment Pushes You Into a Higher Tax Bracket
When the employee files their annual tax return, the severance income is added to their total taxable income for the year. The Lump Sum and Annual Tax Reconciliation It is important to understand that the high withholding rate is an estimate, not the final tax bill.
More About Why is severance pay taxed at a higher rate
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