Severance pay is subject to social security and Medicare taxes. If applicable, as of 2012, calculate Social Security tax on severance pay at 4.2 percent, up to $110,100 for the year. Figure Medicare tax, which has no wage limit, at 1.45 percent. The contribution limit is $6,000 for 2019 and 2020. One easy way to pay fewer taxes on severance pay is to contribute to a tax-deferred account like an individual retirement account (IRA). That works out to about $1600 per week, or $3200 for two weeks. The wage limit for Social Security tax applies to all of your earnings for the year. Something else important to note: If you receive a lump sum near the end of the year (or heck, a large enough sum any time), that could push you into a higher tax bracket, increasing your tax burden over all. We will discuss the various rates that apply for purposes of withholding these taxes. 1/2011) 2. Severance pay in California is not legally mandated, but many employers opt to use it for other reasons. Timing a Severance Package Final pay (rev. With few exceptions, all California employers are covered under the unemployment insurance law and must pay the appropriate unemployment insurance tax. Severance pay is not required under California law. That’s why it’s important to negotiate your severance pay, just as you would your salary. A former employee will be ineligible for benefits if he or she is out of work for one of the following reasons: 1. However, employers who have potential disputes with employees that are leaving employment should consider whether offering severance pay in exchange for a signed severance agreement containing a release of claims against the company may be useful in avoiding costly litigation. # of years with company X 2 weeks of regular pay = Severance Pay $ Total Let’s say your salary is $80,000 per year. Typically, states with income taxes default to following federal regulation principles for distinguishing between regular and supplemental wages. One of the main reasons to utilize severance pay (also called a separation payment) is to get the employee to sign a release of claims against the organization. Also, tax rates can change in the future which means you may pay more (or less) if they change. The company making the payment probably withheld social security tax, Medicare tax, and federal income tax from the payment. If your severance pushes your wages over the threshold, do not pay any Social Security tax on the excess amount. It’s also worth nothing that almost no one has no other source of income in the year, so the marginal tax rate on the severance package is likely to be higher than if you had no other income in the year. In Revenue Ruling 2008-29, the IRS has provided specific guidance on the proper amount of federal income tax an employer must withhold in nine different situations under the supplemental wage regulations 1 that became effective January 1, 2007.