Severance Pay Tax Calculator - Calculate Tax on Severance Package
Free calculator to estimate federal withholding, FICA taxes, and net take-home severance pay for 2025
Severance Pay Tax Calculator 2025
Results
What is a Severance Pay Tax Calculator?
A Severance Pay Tax Calculator is a free financial tool that helps employees estimate taxes owed on severance packages when leaving employment. Severance is taxed as supplemental wages at 22% federal withholding (or 37% over $1 million), plus FICA taxes and state income tax. This calculator computes all tax obligations and your net take-home severance amount.
This calculator is essential for:
- Severance package evaluation - Know your actual net payment after all taxes
- Financial transition planning - Budget accurately during job transition periods
- Tax withholding estimates - Calculate federal, FICA, and state tax deductions
- Installment payment planning - Evaluate lump sum vs installment severance options
- Year-end tax planning - Estimate total tax impact of severance on annual income
For calculating taxes on other supplemental income, use our Bonus Tax Calculator to determine withholding and net pay on performance bonuses using the same IRS supplemental wage rates.
To understand total federal income tax including severance, explore our Federal Income Tax Calculator for comprehensive annual tax liability and marginal rate calculations.
For evaluating unemployment benefits after severance, check our Payroll Tax Calculator to estimate net income from various wage sources.
How Severance Pay Tax Calculator Works
The calculation follows IRS guidelines for supplemental wage withholding (2025):
Federal Withholding (Supplemental Wages)
Federal Tax = Severance × 22% (if < $1M)
Federal Tax = Severance × 37% (if ≥ $1M)
FICA Taxes
Social Security = Severance × 6.2% (up to $176,100 wage base)
Medicare = Severance × 1.45% (all wages)
Additional Medicare = 0.9% if total income > $200K single
State Tax
State Tax = Severance × State Tax Rate
Net Severance
Take-Home = Severance - (Federal + FICA + State)
For installment payments, the calculator divides net severance by number of payments to show your per-payment take-home amount.
Key Concepts Explained
Supplemental Wages
Severance pay is classified as supplemental wages by the IRS, subject to flat 22% federal withholding (or 37% for amounts over $1 million). This is the same treatment as bonuses, commissions, and stock compensation.
FICA Tax Obligation
Severance is subject to Social Security (6.2% up to $176,100 wage base) and Medicare (1.45% on all amounts, plus 0.9% Additional Medicare Tax for high earners). FICA cannot be avoided on severance payments.
Lump Sum vs Installments
Employers may offer severance as lump sum or installments over months. Installments spread tax liability across multiple periods and may reduce bracket jump, but total taxes owed remain similar. Consider cash flow needs when choosing.
Tax Withholding vs Liability
The 22% federal withholding may not match your actual marginal tax rate. If you're in the 32%+ bracket, you'll owe additional taxes at year-end. Use this calculator to estimate true liability and plan accordingly.
How to Use This Calculator
- Enter severance amount - Input the gross severance amount from your severance agreement before any tax deductions
- Enter year-to-date income - Input your total earnings this year before severance (used to calculate Social Security and Medicare Additional Tax)
- Select filing status - Choose Single, Married Filing Jointly, Married Filing Separately, or Head of Household for accurate Medicare Additional Tax calculation
- Enter state tax rate - Input your state's income tax rate (use 0 for states with no income tax like Texas, Florida, Washington, Nevada, or Wyoming)
- Enter installment payments - If receiving severance in multiple payments, enter number of installments (use 1 for lump sum)
- Click Calculate - View your net severance, all tax withholdings, effective tax rate, and per-installment amount instantly
- Review the breakdown - Analyze federal, FICA, and state tax components to understand total tax burden and plan your financial transition
Benefits of Using This Calculator
- Accurate withholding estimates - Calculate exact federal, FICA, and state tax withholding using 2025 IRS rates and Social Security wage base limits
- Financial planning clarity - Know your actual net severance to budget living expenses, job search costs, and debt payments during transition
- Package negotiation power - Understand after-tax value of severance offers to negotiate effectively and compare competing packages accurately
- Tax surprise avoidance - Identify if 22% withholding is insufficient for your tax bracket and plan for additional year-end payments to avoid penalties
- Installment vs lump sum comparison - Evaluate payment structure options to optimize cash flow and potentially reduce total tax burden across tax years
- Year-end tax planning - Estimate total tax impact when severance combines with other income to push you into higher brackets or trigger AMT
Factors That Affect Your Results
- Severance amount threshold - Severance over $1 million is withheld at 37% instead of 22%, significantly increasing federal withholding on large packages
- Social Security wage base - If you've already earned $176,100 in 2025, your severance is exempt from the 6.2% Social Security tax, increasing net proceeds
- Additional Medicare tax - High earners pay extra 0.9% Medicare tax on income over $200K (single) or $250K (married), affecting severance withholding
- State tax rates - State income tax ranges from 0% (no tax states) to over 13% (California), dramatically affecting net severance take-home
- Year-to-date income - Higher prior earnings increase likelihood of hitting Social Security wage base cap and Additional Medicare Tax threshold
- Timing and tax year - Severance paid in December vs January can affect which tax year absorbs the income, potentially impacting bracket and deductions available
Frequently Asked Questions
How is severance pay taxed in 2025?
Severance pay is taxed as supplemental wages at the flat 22% federal withholding rate (or 37% for amounts over $1 million), plus FICA taxes (7.65%) and state income tax. It's taxed as ordinary income, not special treatment.
Is severance pay subject to Social Security and Medicare taxes?
Yes, severance pay is subject to FICA taxes including Social Security (6.2% up to $176,100 wage base for 2025) and Medicare (1.45% on all amounts, plus 0.9% Additional Medicare Tax for high earners over $200K).
Can I reduce taxes on severance pay?
Limited options exist. You cannot defer severance pay taxation, but you can reduce overall tax burden by maximizing 401(k) contributions, contributing to HSA or traditional IRA, or timing receipt across tax years if negotiable.
Will I owe more taxes than what's withheld from severance?
Possibly yes. The 22% federal withholding may be less than your actual marginal tax rate, especially if severance pushes you into higher brackets. Calculate your total annual income including severance to estimate true liability.
How is severance different from regular wages for tax purposes?
Severance is classified as supplemental wages and typically withheld at the flat 22% rate instead of your regular W-4 withholding rate. However, it's still ordinary income on your tax return and taxed at your marginal rate.
Can severance be paid in installments to reduce taxes?
Yes, employers may offer installment payments spreading severance over multiple months or tax years. This can help avoid bracket jump in a single year, but it doesn't reduce total tax owed, just spreads the liability over time.