Compensation paid to an employee upon termination beyond their final paycheck. Severance is fully taxable as supplemental wages and subject to withholding at the flat 22% rate unless aggregated with regular wages.
Why Severance Pay matters for employers
Severance pay is subject to federal income tax withholding and FICA unless paid under a qualifying separation pay plan that meets specific IRS requirements. In most cases, severance is processed through payroll as supplemental wages at the 22% flat withholding rate (37% over $1 million). State income tax treatment varies by jurisdiction. Some states exempt severance from income tax entirely.
Severance agreements often condition payment on the employee signing a release of claims. Structured payment plans that defer severance across multiple years may trigger Section 409A non-qualified deferred compensation rules if not carefully designed. BEG processes severance payments through payroll and applies the correct withholding treatment based on payment structure.
How BEG handles Severance Pay for clients
BEG Managed Payroll handles Severance Pay as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Severance Pay on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Severance Pay themselves?
No. A managed payroll provider handles Severance Pay as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Severance Pay is handled incorrectly?
Errors related to Severance Pay can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Severance Pay for managed payroll clients?
BEG tracks, calculates, and remits everything related to Severance Pay as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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