Severance Pay Calculator
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Understanding Severance Packages
Severance pay is compensation provided to employees upon termination, typically during layoffs or company restructuring. While not legally required by federal law in most cases, many companies offer severance as a goodwill gesture and in exchange for a release of legal claims. The most common formula is one to two weeks of pay per year of service.
Severance packages often include more than base pay: continued health insurance (COBRA subsidy), outplacement services, accelerated vesting of stock options, and payment for unused vacation time. Senior and executive-level employees typically receive more generous severance terms, often outlined in employment agreements.
Severance is generally taxable as ordinary income. You may be able to negotiate the terms of your severance package, especially the amount, benefit continuation period, non-compete restrictions, and reference letter terms. Consulting an employment attorney before signing is advisable, particularly for larger packages.
Frequently Asked Questions
Is my employer required to pay severance?
Federal law does not require severance pay in most cases. The WARN Act requires 60 days notice or pay for mass layoffs. Some states have additional requirements. Check your employment agreement or company policy.
How is severance pay taxed?
Severance is taxed as ordinary income, subject to federal and state income tax, Social Security, and Medicare. Your employer will withhold taxes. Large lump-sum payments may push you into a higher tax bracket temporarily.
Can I negotiate my severance package?
Yes, severance offers are often negotiable. You can negotiate the amount, benefit continuation, non-compete terms, references, and outplacement services. Having an employment attorney review the package is recommended.
Should I sign the severance agreement immediately?
No. You typically have 21 days to review a severance agreement (45 days if part of a group layoff under the Older Workers Benefit Protection Act). Take time to review with an attorney before signing.