Asked in Tax Law

Q: Is NON lump sum (6 mo. payout) severance pay taxed at the same 22% as lump sum on federal taxes?

My company laid me off last week. Per my contract I am to receive 6 months of severance pay at my full pay rate. They are taxing me at 22% federal rate. I know that lump sum severance is taxed at this rate, but is it correct for them to do this at a 6 month payout on regular amount pay? To clarify, I am NOT receiving a lump sum. I am being paid on my regular bi-weekly schedule for a 6 month period. Thank you in advance for any help!

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1 Lawyer Answer

A: Yes, the IRS requires employers to deduct 22% of any severance amount, regardless of how that severance amount is paid to the employee. If you think this is unfair it must be because you have not done--or perhaps cannot do the math. Withholding 22% of any amount of money paid in a lump sum is the same as withholding 22% from each of the six payments.

For example, assuming the lump sum to be $6,000, then 22% of that amount is $1,320--leaving you with $4,688. Assuming the employer elects to pay the $6,000 to you over six months means that each payment of $1,000 will generate a withholding amount of $220. So multiplying $220 by six equals $1,320, the same amount as before.

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