How Is Severance Pay Taxed? (2025 Withholding Guide)

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Meta Description: Severance pay is taxed as ordinary income with 22% federal withholding. Social Security (6.2%), Medicare (1.45%), and state taxes also apply. Learn the rules.

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H1

How Is Severance Pay Taxed?

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ANSWER SECTION

Severance pay is taxed as ordinary income subject to federal income tax, Social Security tax, Medicare tax, and state income tax. For 2025, employers must withhold federal income tax at a flat 22% supplemental rate for severance payments under $1 million. The payment is also subject to 6.2% Social Security tax (up to the $176,100 wage cap) and 1.45% Medicare tax with no cap. Your employer reports severance on Form W-2 as wages.

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H2: Federal Tax Withholding on Severance

Standard Withholding Method (Most Common):

• Flat 22% federal withholding on severance under $1 million
• Applies when paid separately from regular wages
• This is withholding, not your final tax rate

High-Income Exception:

• Severance over $1 million: 37% withholding on amount above $1 million
• Applies to the portion exceeding $1 million only
• Common for executive severance packages

Aggregate Method (Alternative):

• Employer adds severance to your final regular paycheck
• Withholding calculated based on total amount using W-4 rates
• May result in higher withholding than the 22% flat rate

Your Actual Tax Rate:

• The 22% is just withholding, not your final tax liability
• Your actual rate depends on your total annual income
• You may get a refund or owe more when filing

Example - $40,000 Severance:

• Federal withholding at 22%: $8,800
• Final tax liability depends on your tax bracket (10%, 12%, 22%, 24%, etc.)

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H2: FICA Taxes on Severance Pay

Social Security Tax:

• 6.2% employee share
• Applies to first $176,100 of wages in 2025
• Wage cap resets annually with inflation adjustments

Medicare Tax:

• 1.45% employee share
• No wage cap - applies to all severance
• Employer also pays 1.45% match

Additional Medicare Tax:

• 0.9% on earnings above:
  • $200,000 (single filers)
  • $250,000 (married filing jointly)
  • $125,000 (married filing separately)

Total FICA Example - $40,000 Severance:

• Social Security (6.2%): $2,480
• Medicare (1.45%): $580
• Total FICA: $3,060

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H2: State Income Tax on Severance

States With Income Tax: Severance is generally taxable as wages in states with income tax:

State	Tax Rate Range
California	1% - 13.3%
New York	4% - 10.9%
Illinois	4.95% flat
Pennsylvania	3.07% flat

No State Income Tax States:

• Texas, Florida, Nevada, Washington, Tennessee, Wyoming, South Dakota, Alaska
• No state tax on severance pay

State-Specific Notes:

• California: Severance is taxable as supplemental wages
• New York: Withheld at supplemental rates (varies by income)
• Pennsylvania: Flat 3.07% applies to severance

Example - $40,000 Severance in California (9.3% bracket):

• State tax: $3,720

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H2: Tax Reporting and Forms

Form W-2 Reporting:

• Severance included in Box 1 (Wages, tips, other compensation)
• Federal withholding in Box 2
• Social Security wages in Box 3 (up to cap)
• Medicare wages in Box 5 (full amount)
• State wages and withholding in Boxes 16-17

Form 1099-NEC (Independent Contractors):

• If classified as contractor, severance reported on Form 1099-NEC
• Subject to self-employment tax (15.3%)
• No withholding (you make estimated payments)

Timing Considerations:

• Taxable in the year received
• Lump sum: All taxed in one year (may push you into higher bracket)
• Installments: Taxed as received each year (potential tax smoothing)

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H2: Related Tax Questions

For a comprehensive overview of whether severance is taxable and general rules, see our guide on is severance pay taxable covering federal and state withholding requirements.

Learn about other employment-related tax benefits in our guide on are disability benefits taxable covering SSDI, SSI, and private disability insurance rules.

Understand other unreimbursed expenses that may relate to job changes in our guide on unreimbursed employee expenses with the TCJA suspension through 2025.

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