Taxes on severance package and evaluation of severance agreement.

My severance agreement states that taxes will be withheld at the rate of 27%, which is much higher than they would be if they follow the paperwork I filled out for deductions, etc. Additionally, all the taxes are much higher than that. I end up with less than half the amount. I have looked extensively on the web, but can only find the rates for these taxes, 6.20% for social security and 1.45% for medicare. Plus almost $1,500 in fed taxes. This does not add up correctly.

I do not feel I have any basis for a lawsuit, but I do want to receive the pay I am entitled to. I would like the contact information for a local labor attorney in the Tucson area who can answer some of these questions.

1 answer  |  asked Jun 14, 2002 9:07 PM [EST]  |  applies to Arizona

Answers (1)

Francis Fanning
Taxing Severance Pay

You can find the answer to this and other questions in the IRS Publication 15, Circular E, the Employer's Tax Guide. Severance pay falls into the category of supplemental wages. The employer has the option of withholding at a straight 27% rate or recalculating your pay and withholding for the entire year. The important thing to remember is that this is simply withholding. It has nothing to do with the amount of tax you will ultimately have to pay. Also, this deals only with income tax. Social Security and Medicare taxes are in addition to income tax.

MEL Moderator note: Here is an article on tax issues in employment settlement agreements that applies to severance agreements:

posted by Francis Fanning  |  Jun 17, 2002 12:51 PM [EST]

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