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Understanding Severance Pay: What You Need to Know

Severance pay is compensation provided by an employer to an employee upon termination of employment. Whether you're being laid off, let go due to restructuring, or negotiating an exit, understanding how severance pay works is critical for protecting your financial future. Our free severance pay calculator helps you estimate your total package so you can plan ahead and negotiate with confidence.

What Is Severance Pay?

Severance pay is a lump sum or continued salary payments made to employees after their employment ends. It's typically offered when a termination is not the employee's fault — such as during layoffs, company closures, or position eliminations. Severance packages can include cash payments, extended health benefits, outplacement services, and accelerated vesting of stock options. The most common formula is a set number of weeks of pay for each year of service, with two weeks per year being the industry standard.

Typical Severance Packages by Industry

Severance packages vary widely by industry, company size, and seniority level. Entry-level and mid-level employees typically receive 1 to 2 weeks of pay per year of service. Senior managers and directors often receive 2 to 3 weeks per year, while C-suite executives may negotiate packages worth 6 to 12 months of salary or more. Tech companies, financial firms, and large corporations tend to offer more generous packages than small businesses. Many packages also include continuation of health insurance under COBRA for a defined period, which can be worth thousands of dollars.

Legal Requirements for Severance Pay by State

There is no federal law in the United States that mandates severance pay. However, several legal frameworks affect how severance works. The Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100+ employees to provide 60 days' advance notice of mass layoffs or plant closings — and many employers offer severance in lieu of this notice period. Some states have their own mini-WARN acts with stricter requirements. For example, California, New York, and Illinois have additional regulations around mass layoff notifications. If your employer has a written severance policy or if severance is promised in your employment contract, it may be legally enforceable under contract law. Always consult an employment attorney to understand your specific rights.

How Severance Pay Is Taxed

The IRS treats severance pay as ordinary income, meaning it's subject to federal income tax, Social Security tax, Medicare tax, and applicable state taxes. When your employer pays severance as a lump sum, they typically withhold at the federal supplemental wage rate of 22% (or 37% for amounts exceeding $1 million). However, your actual tax liability depends on your total annual income and tax bracket. If severance pushes you into a higher tax bracket, you may owe more at filing time. Some employees negotiate to have severance paid in installments across two tax years to minimize the tax impact.

Tips for Negotiating Your Severance Package

Don't accept the first offer without reviewing it carefully. Request a written copy of the full severance agreement and take time to review it — most employers will give you 21 days (or 45 days for employees over 40 under the Older Workers Benefit Protection Act). Consider negotiating for more weeks of pay, extended health benefits, outplacement services, a neutral reference letter, and removal or modification of non-compete clauses. If your company is asking you to sign a release of claims, the severance amount should reflect the value of what you're giving up. Having an employment attorney review the agreement can be well worth the investment, as they may identify additional leverage or problematic terms in the agreement.