Severance.
In plain English
Severance is compensation paid to an employee who is being terminated or laid off, beyond what is legally required. It is typically calculated as a number of weeks of pay based on tenure (a common formula is one or two weeks per year of service, sometimes with minimums and caps). Severance is almost always conditioned on signing a separation agreement that releases the employer from legal claims. Severance is fully taxable as wages, subject to federal income tax, FICA, and state income tax, and is usually withheld at the supplemental wage rate (22% federal flat, or higher for amounts over $1 million).
01Why it matters
Severance is not required by federal law in most situations; it is a negotiated benefit, which means it is sometimes negotiable. The terms of the release matter as much as the dollar amount, especially the language around non-disparagement, non-compete, and benefits continuation (COBRA, 401(k) match true-ups, equity vesting acceleration). Reviewing the agreement with an employment attorney before signing is common practice for senior roles.
02The math, step by step
An employee with 6 years of tenure earning $90,000 is offered severance at one week of pay per year of service. The package is 6 weeks of base pay = $10,385 gross, paid as a lump sum. After withholding (22% federal supplemental + 7.65% FICA + 5% state) the net check is roughly $6,800. The package also includes a 60-day notice period of continued benefits before COBRA election would begin.
03What this is NOT
Severance comes from the employer; unemployment insurance comes from the state. Severance is contractual and typically lump-sum or short salary continuation; unemployment is a weekly benefit based on prior wages, paid for a limited period (often 26 weeks in many states). Receiving severance can sometimes delay or reduce unemployment eligibility depending on state rules and how the severance is paid out.
04Receipts
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