Severance is a contract, not a right: the Department of Labor is explicit that the Fair Labor Standards Act does not require it, and many workers receive none. Where it is offered, one to two weeks of pay per year of service is the common formula, and the check that arrives is meaningfully smaller than the offer, because severance is taxable wages withheld up front.
How much smaller? Our severance engine’s worked example: a $90,000 earner with five years of service at two weeks per year is offered $17,307.69 and deposits $12,175.96. Withholding takes 29.7 percent before the money ever lands.
A layoff is a bad week to learn payroll tax rules, and the offer letter will not do the math for you. So here it is, number by number, with the two decisions (timing and unemployment) that can genuinely change what you keep.
How much severance should you expect?
Whatever the formula in your offer or company policy produces, because no law sets a floor. The common structure is weeks of pay per year of service: at $90,000, weekly pay is $1,730.77, so five years at two weeks per year makes 10 weeks and $17,307.69 gross. Some packages add a flat base, such as four weeks for everyone, on top of the per-year formula.
Two formulas, materially different money. The same five-year employee at one week per year grosses $8,653.85 instead, half the package. If your offer letter is vague about the formula, that ambiguity is worth resolving before you sign anything, and the severance pay calculator turns any formula into a number in seconds.
One adjacent rule sometimes confused with severance: the federal WARN Act requires 60 days of advance notice for covered plant closings and mass layoffs, generally at employers with 100 or more workers. That is a notice requirement, not a severance requirement, though some employers pay wages in lieu of the notice period.
How is severance taxed?
As supplemental wages. Per IRS Publication 15, employers using the percentage method withhold a flat 22 percent for federal tax (37 percent on any amount above $1 million), plus the normal payroll taxes: 6.2 percent Social Security up to the wage base and 1.45 percent Medicare on all of it. States with income tax add their own supplemental rate.
Here is the full stack on the worked example, computed by the engine:
State withholding moves the net materially. The same package in California, at its 10.23 percent supplemental rate, loses another $1,770.58 and nets $10,405.38, almost exactly 60 cents on the dollar.
Is severance really taxed more heavily than salary?
No, and this is the most expensive misunderstanding in a layoff year. The 22 percent flat rate is withholding, a prepayment. On your return, severance is ordinary income in the same brackets as your salary, and a layoff usually means a lower-income year than normal.
That combination tips in your favor. If your final taxable income puts you in the 12 percent bracket for part of what was withheld at 22, the difference is not lost; it comes back as a refund when you file. The reverse can also happen: a large package on top of a high-income year can owe more than the flat rate held back, which is worth checking before you spend the whole net.
The practical rule: the net check is your planning number for the months ahead, and filing season is the true-up.
Can you collect unemployment while severance pays out?
It depends entirely on your state. Some states pay full benefits alongside severance. Others delay benefits until the weeks the package covers have run out, or reduce them dollar for dollar, and several treat a lump sum differently from salary continuation. Unemployment compensation is itself taxable income at the federal level, per IRS Topic 418.
Because these rules decide whether two income streams overlap or run in sequence, check your state unemployment office before building your monthly plan. Our layoff runway playbook walks through how benefits, savings, and severance stack into a run-out date.
What does the same formula pay at different tenures?
The per-year structure means tenure compounds the package. Three engine-computed examples, all single filers with half a year of wages already earned:
| Package | Weeks | Gross | Net after withholding |
|---|---|---|---|
| $90,000 salary, 5 years at 1 week/year | 5 | $8,653.85 | $6,087.98 |
| $90,000 salary, 5 years at 2 weeks/year | 10 | $17,307.69 | $12,175.96 |
| $120,000 salary, 12 years at 2 weeks/year + 4 base | 28 | $64,615.38 | $45,456.92 |
The 28-week package is the reminder that long tenure is worth real money at exit: nearly $65,000 gross, and the $45,457 net covers about 13 months of the layoff runway calculator’s default $3,500 of monthly essential spending.
What are the expensive mistakes?
Planning your runway on the gross. The offer letter number is 30 to 40 percent bigger than the deposit once federal, payroll, and state withholding land. Budget from the net.
Signing on the spot. A severance agreement pays you for a release of claims, which is exactly the setting where terms move: weeks of pay, the treatment of unvested equity, COBRA premiums, references, and payment timing are all commonly negotiated. Take the review period the agreement offers.
Ignoring the calendar. A December layoff with a January lump sum can shift the whole package into a year when your income, and therefore your bracket, is lower. Same dollars, less tax.
Double-counting unemployment. If your state offsets benefits during severance weeks, the two incomes run in sequence, not in parallel. A runway plan that stacks them both overstates the date your money runs out.
Forgetting health coverage. COBRA lets you keep the employer plan, but you pay the full premium yourself, plus an administrative fee of up to 2 percent, where your employer previously covered most of the cost. Price it before the package feels comfortable.
Your severance checklist
- You know your formula (weeks per year, any base weeks) and your weekly pay.
- You have the net figure from the severance pay calculator, with your state’s supplemental rate entered.
- You have checked your state’s unemployment rules for severance offsets before scheduling both incomes.
- You asked about timing (lump sum versus continuation, this year versus next) before signing.
- Your monthly plan runs on net severance plus savings, priced with COBRA included.
The bottom line
Severance is negotiable going in and taxable coming out, so the two numbers that matter are the formula and the net. Run your package through the severance pay calculator, then hand the result to the layoff runway calculator to see how many months it actually buys.
This is educational information, not tax, legal, or negotiation advice. Withholding follows IRS Publication 15; your agreement, your state’s rules, and your filing situation control the real outcome.