Severance Pay Am I Entitled To
Amid economic uncertainty, layoffs are happening in droves. While it’s not ideal, the silver lining in these scenarios is that many companies are offering employees a severance package. But, severance pay can be taxed differently than regular wages and can have an impact on your near-term finances, as well as come tax time next year.
severance pay is the money an employer pays to a departing employee in exchange for a release of claims against the company. It can be paid in the form of a lump sum or in installments. Some severance packages also include vacation or sick pay, retirement contributions and other benefits, such as life insurance coverage.
How much severance you receive depends on your position in the company hierarchy and how your job was terminated. Entry-level employees are often paid one week of salary for every year they’ve worked, while upper management can expect a full month’s salary for each year on the job. The amount is usually determined by the executive committee of the company.
How Much Severance Pay Am I Entitled To?
Most employers consider severance pay a type of taxable income. Depending on how it’s delivered, it can be treated as either a benefit or a bonus. A lump sum of severance pay is typically taxable at your standard rate for employment income, which will take into account your federal, state and local taxes. It’s also subject to deductions for employment insurance premiums and Canada Pension Plan contributions, if applicable.
Employers may choose to treat severance pay as supplemental wages, which is taxed at a lower flat 22% rate. This is a better option for workers since it reduces the likelihood of being pushed into a higher tax bracket. However, if your severance package includes accumulated vacation or sick days, it will be taxable at the same rates as your normal wages.
If your company is laying off staff, it must comply with federal law by providing you with notice that your job is at risk of being terminated and the amount of severance you can expect. This is called “adequate and reasonable notice” under the WARN Act.
In addition to severance pay, your company might offer other forms of termination compensation, such as a moving retiring allowance or a cash advance for your final paycheck. These are all considered income and are subject to the same tax rules as your severance payment.
Whether or not you can negotiate for more severance pay is a question that will vary by employer, but Clark says it can be worth asking. An employer that is concerned it could be sued by a departing employee for unfair dismissal may be more open to increasing your severance package.
Even if your company isn’t laying off staff, you should be prepared for your job to end unexpectedly, by having emergency savings that will last you at least 60 days. In addition, you should review your severance package to determine how it will be taxed and make sure that the amount is adequate for your situation.