How severance packages are sized
There is no federal law requiring severance pay. It comes from an employment contract, a collective bargaining agreement, a written company policy, or a separation agreement offered at the time of a layoff, usually in exchange for a release of legal claims. The near-universal convention is a number of weeks of pay per completed year of service. One week per year is the most common formula for rank-and-file employees, two weeks per year is typical for managers and in generous tech and finance packages, and a cap of 26 weeks keeps long-tenured payouts from running away. Many packages also add a flat base, such as four weeks plus one week per year.
Worked example: an employee with eight completed years and gross weekly pay of $1,500 on a one-week-per-year formula earns eight weeks, or $12,000 gross. Federal withholding at the 22% supplemental rate takes $2,640.00, Social Security takes 6.2% or $744.00, and Medicare takes 1.45% or $174.00. With no state tax, the check nets $8,442.00, about 70% of the gross figure.
How severance is taxed
Severance is wages for tax purposes, which surprises people who expect it to be treated like a settlement. Employers almost always withhold federal income tax at the flat 22% supplemental rate rather than running it through your W-4, and the rate jumps to 37% on supplemental wages above $1 million in a calendar year. Social Security and Medicare apply as usual, so 7.65% comes out unless you have already passed the $176,100 Social Security wage base for the year.
That 22% is only withholding. When you file, the severance is stacked on top of your other income for the year and taxed at your real marginal rate. Someone laid off in January with little other income will likely get a refund; someone laid off in November after a full year of salary may owe more. Unused PTO paid out at separation is also wages and is withheld the same way.
Notice periods and negotiating room
The WARN Act requires employers with 100 or more employees to give 60 calendar days of written notice before a plant closing or a mass layoff, defined roughly as 50 or more workers at a single site. Employers that skip the notice owe back pay and benefits for the notice period, and some simply pay 60 days in lieu of notice. Several states run their own mini-WARN laws with lower headcount thresholds and longer notice, New York and New Jersey among them.
Severance terms are often negotiable, especially the release language, the continuation of health coverage, the treatment of unvested equity, outplacement help and whether the company will contest an unemployment claim. Workers over 40 who are asked to waive age-discrimination claims must be given at least 21 days to consider the agreement, 45 days in a group layoff, plus seven days to revoke after signing. Severance can also postpone unemployment benefits in some states, so check the timing before signing.