Severance Pay: Is It Required, and How Is It Taxed? — In Plain Words

This page is general information only. It is not legal advice.

This page answers two questions about severance pay.

First: does federal law require an employer to pay it?

Second: how is severance pay taxed?

The first answer comes from the U.S. Department of Labor.

People call it the DOL for short.

The second answer comes from the Internal Revenue Service.

People call it the IRS for short.

The DOL part and the IRS part are kept apart on this page.

Each part is labeled with the source it came from.

This page does not merge the two sources into one blended rule.

This page covers the federal rules the sources state.

It states no state severance rule of its own.

The short answer

On the DOL side: no, the Fair Labor Standards Act does not require severance pay.

The DOL calls severance pay a matter of agreement between an employer and an employee.

On the IRS side: yes, severance pay is taxed.

The IRS treats severance payments as wages.

Publication 15 states that severance payments are subject to Social Security and Medicare taxes, federal income tax withholding, and FUTA tax.

Publication 4128 states that severance pay is taxable in the year that you receive it, and that your employer will include this amount on your Form W-2.

The rest of this page prints each source under its own heading, in that source's own words.

This page states the rules.

It does not decide whether any one reader is owed severance pay.

Department of Labor: what the Severance Pay page says severance pay is

The Department of Labor has a page called "Severance Pay."

The page opens with these sentences.

Severance pay is often granted to employees upon termination of employment.

It is usually based on length of employment for which an employee is eligible upon termination.

Those are the page's words for what severance pay is and what it is usually based on.

The page gives no formula for working out an amount.

Department of Labor: the FLSA does not require severance pay

The Severance Pay page then states the core rule.

There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay.

Severance pay is a matter of agreement between an employer and an employee (or the employee's representative).

In plain words, the federal wage law named on that page does not order an employer to offer severance pay.

Whether severance pay exists at all is left to agreement, as the page states it.

That is the whole of the DOL rule on this page.

The page names no state law and sets no amount, deadline, or formula.

Department of Labor: the EBSA help line on the same page

The Severance Pay page names one office that may be able to help.

The Employee Benefits Security Administration (EBSA) may be able to assist an employee who did not receive severance benefits under their employer-sponsored plan.

Please contact EBSA if you have any questions.

That is the help line exactly as the DOL page states it.

Note the limit in the page's own words.

The help described is for an employee who did not receive severance benefits under their employer-sponsored plan.

The page does not promise help in any other kind of case.

Department of Labor: pages and contact details printed on the Severance Pay page

Under "Webpages on this Topic," the Severance Pay page lists two items.

The first item is "How is Severance Pay Calculated and When is it Due?"

The page says those are answers from the elaws FLSA Advisor.

The second item is the Handy Reference Guide to the Fair Labor Standards Act.

The page says the guide answers many questions about the FLSA and gives information about certain occupations that are exempt from the Act.

The Severance Pay page ends with this address.

200 Constitution Ave NW, Washington, DC 20210.

It prints this phone number.

1-866-4-USA-DOL.

It also prints the same number in figures only.

1-866-487-2365.

It prints this website name.

www.dol.gov.

Those are the details exactly as the page prints them.

Layoff-notice law is a different topic from severance pay, and this page does not cover it.

IRS Publication 15: severance payments are wages

Publication 15 is the IRS Employer's Tax Guide.

People call it Circular E.

In its opening material, under the heading "Severance payments," Publication 15 states this rule.

Severance payments are wages subject to social security and Medicare taxes, federal income tax withholding, and FUTA tax.

FUTA is the federal unemployment tax.

That one sentence is the IRS rule for what severance payments are and which taxes apply to them.

It appears in the 2026 edition of Publication 15.

IRS Publication 15, section 7: severance pay is a supplemental wage

Section 7 of Publication 15 is called "Supplemental Wages."

It defines supplemental wages this way.

Supplemental wages are wage payments to an employee that aren't regular wages.

The section lists what they include.

They include, but aren't limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, reported tips, retroactive pay increases, and payments for nondeductible moving expenses.

So severance pay is on the IRS list of supplemental wages.

The section also states that other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan.

It states that how you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages.

IRS Publication 15, section 7: how income tax is withheld from supplemental wages

Section 7 gives the withholding rules in two groups.

The first group is for supplemental wages combined with regular wages.

If you pay supplemental wages with regular wages but don't specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.

The second group is for supplemental wages identified separately from regular wages.

If you pay supplemental wages separately, or combine them in a single payment and specify the amount of each, the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages.

If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, section 7 gives two methods.

Method one: withhold a flat 22% (no other percentage allowed).

That flat 22% rate is stated by the IRS in section 7.

Method two is the add-up method.

In that method, the supplemental wages are added to the regular wages, the income tax withholding is figured as if the total were a single payment, and the tax already withheld from the regular wages is subtracted.

The remaining tax is withheld from the supplemental wages.

If you didn't withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, section 7 says to use the add-up method.

Section 7 then states this rule for every method.

Regardless of the method you use to withhold income tax on supplemental wages, they're subject to social security, Medicare, and FUTA taxes.

IRS Publication 15, section 7: supplemental wages over $1 million in a year

Section 7 states a special rule for very large supplemental wage totals.

Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million.

If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 37% (or the highest rate of income tax for the year).

The section says to withhold using the 37% rate without regard to the employee's Form W-4.

The opening material of Publication 15 states the same rates in short form.

The withholding rate on supplemental wages remains 22% (37% if supplemental wages paid to an employee during the calendar year exceed $1 million).

Those rates and that $1 million figure are printed here only because Publication 15 states them.

IRS Publication 15, section 15: the table row for severance or dismissal pay

Section 15 of Publication 15 is called "Special Rules for Various Types of Services and Payments."

It has a table with three tax columns.

The columns are federal income tax withholding, social security and Medicare, and FUTA.

The table has a row headed "Severance or dismissal pay."

For federal income tax withholding, the row says: Withhold.

For social security and Medicare, the row says: Taxable.

For FUTA, the row says: Taxable.

That table row matches the "Severance payments" sentence printed earlier on this page.

IRS Publication 4128: severance pay is taxable, and it goes on Form W-2

Publication 4128 is called "Tax Impact of Job Loss."

It is written for workers who have lost a job.

Its facts page states this.

Severance pay and unemployment compensation are taxable.

Payments for any accumulated vacation or sick time are also taxable.

You should ensure that enough taxes are withheld from these payments or make estimated payments.

The publication then gives a question and answer under the heading "Is severance pay taxable?"

Yes, severance pay is taxable in the year that you receive it.

Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes.

See Publication 525, Taxable and Nontaxable Income, for additional information.

That is the IRS answer exactly as Publication 4128 prints it.

The DOL part of this page and the IRS part of this page answer two different questions. The DOL states whether severance pay is required. The IRS states how severance pay is taxed when it is paid. Neither part changes the other part.

What these sources do not decide

The DOL Severance Pay page states a general rule about agreement.

It does not decide whether any one person's employer agreed to pay severance, or what any one agreement says.

The IRS publications state how severance pay is taxed.

They do not decide whether any one person will be paid severance.

This page does not decide whether any reader is owed severance pay.

It does not decide any one person's tax bill either.

Where the sources are silent, this page is silent too.

This page is general information only. It is not legal advice.