I got taxed 40% on my severance pay, is that right?

Question

I just got my severance check in the mail today from the company that let me go and they took out $5800 in taxes on a $14,700 payment... Can that be right? That comes out to 40% when Im in only a 25% tax bracket...

Answer 1

It was a lump sum payment. It's required for those type payments. You should get the difference back when you do your taxes.

If they were nice, they'd just pay you your salary for however many payments and you wouldn't have been taxed so high. Maybe it's better you're no longer there.

Answer 2

The first question is whether that 40% figure is just for federal withholding taxes, or whether that percentage includes FICA, Medicare, and state and local taxes. Since the highest individual tax bracket is still 35%, it's likely that your 40% is made up of several different taxes, and is not just federal withholding.

Now, back to the problem of the amount of federal taxes withheld. Your employer has two choices regarding withholding when it comes to one-time payments such as these. They can either withhold at a flat rate of 25%, or they can treat the severance payment as regular wages and compute the withholding tax accordingly. Some companies will give you a choice, but they are under no obligation to do so.

Answer 3

According to Publication 15 (Rev Jan 2006) Circular E, Employer's Tax Guide - in section 7 Supplemental Wages (page 12-13), an employer has two methods for figuring withholding of supplemental wages (severance is listed as an example of supplemental wages):

(1) If paid alone or if identified separately from regular wages paid in the same period, the Federal income tax withholding can be at a flat 25%.

(2) The alternative is to figure the tax using the period tables, which can only go as high as 35%.

FICA and state income taxes must also be withheld. FICA is 7.65%. If your Federal withholding alone (without FICA taxes) was at 40%, then they have made an error. If they withheld using single tables for a weekly period, the FIT withheld would be as high as 32.3% and the FICA total of 7.65% would bring the total to 39.95% without state tax.

You shouldn't worry too much, though, because you will get the amount over-withheld back when you file your income tax return for the year.

Answer 4

You probably got your severance as a regular paycheck, just in one lump sum. Taxes are taken out as if you made that much every pay period, so when you get an extremely large check, withholding is at a high percent.

When you do your tax return, your total income for the year will be added up and your taxes calculated on that amount, so you'll likely end up with some of it refunded.

Answer 5

Severance Check

Answer 6

The severance pay may have put you into a higher tax bracket. It will all come out in the wash when taxes are filed.

Answer 7

Your employer had the option of withholding at a flat rate or withholding at a rate based on treating the severance check as being part of your last regular paycheck. The former is simple, the latter considerably less so. I have never heard of an employer using the second method.

Answer 8

You have 40% of your severance WITHHELD. Your taxes are determined by your total income and deductions on your tax return. As others have said, this probably includes FICA, and state tax withholding as well as federal income tax.

Answer 9

Because you were given a lump sum payment, the government taxes you based on the amount paid to you. So because of the amount, you were taxed at the 40% level.

Answer 10

7.65% fica/medicare, maximum federal rate 35% and maximum state rate. doesn't sound right. you will probably have a reaason to file as soon as possible in January to get a refund.