receiving severance pay
The economic slump has seen many employers cutting back on staff, resulting in layoffs across the country. For those being laid off, severance pay can provide a safety net to cushion the blow of losing a job and help re-establish one’s financial footing. But there are tax implications to consider, and those consequences can have a big impact on your wallet.
The IRS treats severance payments and payouts for unused vacation time the same as regular wages, which means that they are subject to federal income taxes and withholding, including Social Security and Medicare. A skilled severance pay lawyer can ensure that there are no mistakes made in this process, and you receive the money that you deserve.
If you received a lump-sum payment, the severance pay will be taxed at a flat rate of 22% in the year that it is paid out. Depending on how much you receive and your current annual income, this hefty chunk of change could bump you up into a higher tax bracket, or disqualify you from certain credits and deductions.
Are there tax implications for receiving severance pay?
Depending on how you are paid, you may also be required to report your severance pay lawyer on your state and local tax returns. This will depend on your state’s laws, and you should consult a tax professional to ensure that you are following all applicable rules.
In some cases, you may have to wait until after filing your tax return before paying any severance payments. This is because the taxes are based on your income for that year, and you won’t know how much you will have earned until you submit your tax return. In this case, you can ask your employer to split up your severance pay payments so that half of the payout counts as income for the next year.
Other ways to minimize your severance pay tax liability include deferring the payment into a retirement account, and donating any excess to qualified charities. Depending on your situation, you may be able to use your severance pay to cover a gap in your income, or make additional contributions to a health savings account or personal IRA. If you replaced your former employer’s insurance with marketplace coverage, your severance pay may be a good way to afford the premiums during the special enrollment period. For any other tax questions, it is best to consult a professional, as every person’s tax situation is different.