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. A more effective method is to request that the employer use the "aggregate method," where the severance is combined with the last regular paycheck, or to specifically instruct payroll to use a flat rate that aligns with the employee's actual tax bracket, if allowed by company policy.
How Lump Sum Payments Increase Your Tax Bill
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. The 22% flat rate is simply the amount pulled from the check and sent to the government upfront.
When the employee files their annual tax return, the severance income is added to their total taxable income for the year. This method frequently pushed the combined income into a higher tax bracket, resulting in a substantial and unexpected tax bill.
How Lump Sum Payments Trigger Higher Taxes on Severance
To simplify the process and ensure consistent revenue collection, the IRS updated its withholding rules. The Shift to Flat Rate Withholding Historically, the taxation of supplemental wages was complex, often requiring employers to aggregate the severance with the employee's regular salary for the pay period.
More About Why is severance pay taxed at a higher rate
Looking at Why is severance pay taxed at a higher rate from another angle can help expand the discussion and give readers a second clear paragraph under the same section.
More perspective on Why is severance pay taxed at a higher rate can make the topic easier to follow by connecting earlier points with a few simple takeaways.
