Will the severance be paid as a lump sum, or do we have the option to receive it as staggered/salary continuation payments?
If paid as a lump sum, what tax withholding rate will be applied?
Thank you for your help.
10 replies (most recent on top)
@a6 is there any other reason it's better for the company to do lump sum besides "getting it over and done with" and not having payroll dealing with people's pay who are no longer employed.
The company can't hold on to our withheld taxes, there are strict schedules the IRS mandates for companies to turn over withheld taxes to the government.
Just trying to figure out how the company would benefit from us being taxed higher now and then the tax rate adjusted when we file.
Dont forget your portion of COBRA if that applies to your situation.
If our final check is paid as a lump sum, many companies withhold taxes at a higher rate than they would for a regular paycheck. However, the IRS ultimately taxes severance as ordinary income. If too much tax is withheld initially, you'll receive the difference back (or owe less) when you file your 2026 tax return.
Federal Tax TreatmentIncome Tax: Severance pay is classified as taxable gross income. The IRS generally taxes lump-sum VSP payments as supplemental wages. Employers usually withhold a flat federal rate (currently 22%) on these payouts, though the actual tax rate depends on your total annual income. FICA Taxes: VSP payments are subject to Social Security (6.2%) and Medicare (1.45%) taxes.
California State Tax TreatmentIncome Tax: California taxes VSP payouts just like regular wages. Because California has a graduated income tax bracket ranging from 1% up to 12.3% (with an additional 1% surcharge on incomes over $1 million), your exact state tax burden will be based on your total gross income for the year. State withholding typically ranges between 6% and 10.23% for supplemental wages. Payroll Taxes: State Disability Insurance (SDI) may also be deducted depending on the current year’s wage limit.
Question to ask the VSP hotline - will they withhold at the flat rate above or the aggregate amount?
The lump sum unfortunately will be taxed like a bonus.
The hotline confirmed that is paid as a lump sum - and due to that - IRS considers that as a supplemental wage and they tax that at 22%...plus what ever your state taxes are. FUN.
Its a lump sum which is better for them because they can tax the he-l out of it so keep in mind a large chunk will be taken out
Lump sum. Has happened to me before
It’s a lump sum and unfortunately it’s taxed at a higher rate than regular.
I called the VSP hotline the 1st week and when they called me back they said it should be a lump sum...but they werent sure yet till the VSP actually happens. hope this helps