Severance Pay Tax Calculator

Why your severance check was smaller than the offer letter

The number in the separation agreement is gross. What lands in your account is that number minus federal withholding, FICA, and state tax, and the federal piece is usually taken at a flat rate that has nothing to do with your bracket.

Take a single filer with $95,000 of wages already earned in 2026 who is laid off with $40,000 of severance and a $4,000 PTO cash-out. The two are supplemental wages together, so the employer withholds on $44,000. Federal withholding at the flat 22% is $9,680. Wages so far are well under the $184,500 Social Security base, so the full $44,000 is subject to 6.2%, which is $2,728. Medicare at 1.45% adds $638. Before any state tax, $13,046 is gone and $30,954 arrives.

Change one input and the picture moves. If the same person had already earned $190,000 this year, the Social Security wage base is gone and that $2,728 line drops to $0. Combined wages of $234,000 do cross the $200,000 Additional Medicare withholding threshold, which adds $306 back, so total withholding falls from $13,046 to $10,624 and take-home rises from $30,954 to $33,376. Most severance calculators never ask for year-to-date wages, so they overcharge Social Security on anyone who capped out months earlier.

Severance is wages: FICA, your W-2, and the 2026 Social Security cap

Severance is not a settlement, and it does not arrive on a 1099. It is compensation for employment, reported in Box 1 of your W-2, and it is subject to FICA. That last point was litigated: in United States v. Quality Stores, Inc. (2014) the Supreme Court held that severance paid to terminated employees is FICA wages.

Three FICA pieces apply. Social Security takes 6.2% of wages up to the 2026 wage base of $184,500, counting everything paid by that employer during the year, so the severance is only taxed on whatever room is left under the cap. Medicare takes 1.45% with no cap at all. Additional Medicare adds 0.9% on the wages that employer pays you above $200,000 in the year, whatever your filing status. The $250,000 threshold for joint filers and $125,000 for married filing separately apply when you file, on Form 8959, where any difference from the withholding is settled.

Timing is what makes severance different from a bonus. Layoffs cluster in the second half of the year, so by the time the check is cut, many people have already used up part or all of the wage base. The Social Security line here is often partial and sometimes zero, so the banner above spells out which case you are in rather than leaving a bare $0.00 on the screen.

Lump sum vs. salary continuation: withholding, tax years, and unemployment

The choice between a lump sum and salary continuation does not change the tax rate. Both are ordinary wages. What it changes is how the money is withheld and, sometimes, which year it lands in.

A lump sum paid separately from payroll is a supplemental wage payment. Under IRS Pub. 15 section 7, the employer may take a flat 22%, rising to 37% on any part above $1,000,000 of supplemental wages for the year. Salary continuation is paid through regular payroll runs, so withholding comes from your W-4 and the Pub. 15-T wage-bracket tables, which track your projected liability much more closely. So the calculator switches methods when you change the payout chip instead of applying 22% to everything.

Continuation that runs past December splits the money across two tax years. The Social Security wage base resets every January, the income spreads across two sets of brackets, and 2027 income may be lower if you are still looking for work. Those effects are real, but this calculator models a single 2026 tax year, so treat a cross-year package as two separate runs once the 2027 figures exist.

Unemployment is the other variable. A few states count severance as disqualifying wages for the weeks it covers. Others apply that only to salary continuation. Others ignore a true lump sum entirely. Call your state agency rather than assuming, because the answer can be worth more than the withholding difference.

Over-withheld or under-withheld? What happens at filing

Flat 22% withholding is a guess about your bracket, and after a layoff the guess is usually too high. If your income stops in August, your full-year total may put you in the 12% or 22% bracket instead of the 24% or 32% bracket your salary implied. The tool compares the flat withholding against the tax the severance actually adds on top of your projected full-year income, so the gap you see is the amount likely to come back as refund.

For high earners it runs the other way. If the severance sits on top of enough income to land in the 32% or 35% bracket, a flat 22% under-withholds, and the shortfall is due in April. A large enough shortfall can also trigger an estimated-tax penalty, so run the numbers through the underpayment penalty calculator and consider a Q3 or Q4 estimated payment. The tax refund estimator puts the same figures into a full-year refund picture.

One refund is easy to miss. If you start a new job the same year, the new employer restarts Social Security withholding from zero, because the wage base is tracked per employer. You can end up paying 6.2% past $184,500 across the two jobs. That excess is not lost: claim it as a credit on Schedule 3 of Form 1040. When the new job starts, reset withholding with the W-4 withholding calculator, and use the FICA payroll tax calculator to confirm how much Social Security you have already paid for the year.

These figures are estimates for the 2026 tax year. They are not tax or legal advice. Confirm your own numbers with a tax professional before you file or before you sign a separation agreement.