While this can sometimes lower the supplemental rate, it risks bumping the total income into a higher bracket for that specific pay period. 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.
Severance Pay Tax Rate Vs Regular Pay: What You Need to Know
Furthermore, this flat rate only covers federal income tax. When the employee files their annual tax return, the severance income is added to their total taxable income for the year.
The employer must still withhold the standard 6. The current flat rate system applies a uniform 22% rate to severance payments of $1 million or less, making the calculation straightforward for employers but often resulting in a higher immediate tax than some employees anticipate.
Severance Pay Tax Rate Vs Regular Pay: Why The Flat 22% Often Costs More
Conversely, if the withholding was insufficient, the employee will owe the remaining balance. In high-tax states like California or New York, this can result in state withholdings of 9% to 13%, effectively stacking the state tax burden on top of the federal 22%.
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.
