Severance Pay Be Tax Free
When a company announces layoffs, it can be devastating for employees and their families. But some laid off employees may be offered severance pay as a way to help make the transition less stressful. Severance packages can feel like a lifeline, obligation or insult, depending on many factors, including the size of the severance package, how long the employee was employed and the industry norms for severance packages. Regardless of how you feel about it, the IRS views severance pay as income and is taxed accordingly.
Severance packages typically offer one or two weeks of pay for every year of employment for salaried workers and more for middle managers and executives. Often, companies also offer outplacement programs which include services like resume review, career counseling and interview coaching to assist the departing worker in finding a new job. Outplacement programs are optional and most professionals decline them.
A large severance package could cause you to move into a higher tax bracket in the year that it is received because you are receiving a significant bump in your income. If possible, you should consider putting part of your severance package into tax-advantaged accounts such as IRAs and HSAs to reduce your overall tax burden.
Can Severance Pay Be Tax Free?
Some severance pay lawyer packages also come with cash or other assets that are subject to taxation. If you have not reviewed your tax situation for a while, it is important to do so before you receive your lump sum severance package. If necessary, you should consider adjusting your other withholding amounts or making an estimated tax payment to avoid any unpleasant surprises at tax time.
Another issue to watch for is whether the severance package includes cash or other assets that are subject to capital gains tax. If so, you should be careful about how the money is invested to minimize any potential taxes. Finally, severance payments may be taxable as unemployment compensation if they meet certain criteria. If you are unsure about how your severance package will affect your unemployment eligibility, you should check with a tax professional to learn more about the rules and regulations in your area.
Although many companies take a “take it or leave it” approach and will not negotiate with severance package terms, there are some that are more open to increasing a payout as an incentive for employees to sign their severance agreement. Braverman Law PC can review your severance agreement to ensure that you are getting all the benefits that you are entitled to under the contract. If not, we can advise you on your rights to file a lawsuit for breach of contract and/or age discrimination against the employer. Contact us to schedule a consultation. We represent clients throughout the country. Our firm has experience reviewing severance agreements for individuals, startups, small businesses, private and public companies, government contractors and non-profit organizations. We are committed to providing high-quality service and we are available for meetings at our office in Boston or remotely via video conference.