Why your severance check was smaller than expected

The short answer

Severance is usually treated as supplemental wages, so employers commonly withhold federal income tax at a flat 22 percent, plus California withholding, plus Social Security and Medicare. Withholding is a prepayment, not your final tax. Because a job-loss year is often a lower-income year, some people get part of it back when they file.

Withholding is not your tax

Employers often withhold federal income tax on severance at a flat 22 percent because it is a supplemental wage. California withholding and Social Security and Medicare are taken out as well. The Supreme Court settled in 2014 that severance is wages for Social Security and Medicare purposes.

All of that is a prepayment. Your actual tax is calculated on your return, across the whole year.

Why refunds are common

A year with a job loss often has less total income than the withholding assumed. If your income for the year lands in a lower bracket, some of what was withheld may come back when you file.

The agreement shapes the tax

How the payment is described in the agreement matters. Wages for work already done, severance, and other settlement categories can be reported differently. Getting the description right happens before signing, not after.

Check the statement

Compare the final pay statement to the agreement line by line. A total that matches can still put money in different categories than the agreement described.

Common questions

Is severance subject to Social Security and Medicare?

Yes. The Supreme Court held in United States v. Quality Stores (2014) that severance payments are wages for FICA purposes.

Is 22 percent my actual tax rate on severance?

No. It is a common withholding rate for supplemental wages. Your actual tax is worked out on your return for the whole year.