Wondering if someone can provide perspective on how taxes work with the LR package. I understand it will probably push me to a higher tax bracket but will all proper taxes be taken out from Cisco directly? Do I need to do anything myself? And lastly, can I put severance pay towards 401k or is that not allowed? Many thanks in advance and best wishes to all
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Good advice. You will very likely be in a higher federal tax bracket than 22%. The IRS will want their share.
The tax implications for any of the severance packages are significant. On the positive side, it is likely you will be above the FICA threshold so you will save 6.5% on any compensation over $137,700. On the negative side, it is just as likely your total Adjusted Gross Income will be above $250,000 which means you are subject to the 3.9% Medicare tax. This 3.9% tax applies to wages, investment income, miscellaneous income, rents, or any other money making activity that provided you compensation. Even though your severance will be taxed at the 22% rate, your true marginal rate may end up being above 22%, which again includes your other income sources. So, yeah, do some quick calculations, be prepared to pay Estimated Taxes in December out of your severance and hope your cipherin' is close enough so that you do not have to pay a tax penalty to the IRS and/or your State DOR because you withheld too little. You may find you are actually 'renting' your severance until next April 15th. Realistically, assume you will net 50% of whatever package you receive. Postpone the Lambo purchase until after you pay your 2020 taxes. If only we had the option to delay the package until 2021 .....
It is treated as income and taxed as such.
I guess those of us taking the ER were treated better - maybe because we’re old or were given a better HR resource.
More likely, of the 7K eligible for the ER and the 2.1K who actually took it, there were a lot less people calling HR with questions so you could get to a person quicker. HR probably hasn't increased their staff other than to hire a bunch of "tier 1" people to answer calls, direct people to FAQ pages or open cases where real assistance is required to allow the regular HR staff to triage the cases.
Sorry for the poor HR support.
I guess those of us taking the ER were treated better - maybe because we’re old or were given a better HR resource.
I was LR'd last week and called HR number they gave me to ask tax question and an outsourced person said they would open a case and someone would get back to me in 7 days....What a joke
Thank you friends. I appreciate the info
For the 401k, you can’t use severance directly, but you can increase your withholding on your regular pay to meet the annual 401k max. Then use your severance to replace the reduction in salary seen. This is a simple way to reduce your taxes given the increase in income you will see with the severance payment.
You can check with HR about the Cisco match true up. I did this for my ER and was told I would get the true up added to my 401k account early in 2021.
Standard percentage withheld is 22.5% for federal, and addition state withholding varies depending on the state you live in.
For the ER, my tax person reminded me that there can be penalties if you don’t have enough taken out. Cisco will take out a large percentage. Best to check with a tax person to review it and arrange additional payment if needed.