ask for severance pay
A severance package is pay and benefits given to an employee when they are terminated or laid off without cause, which means it was not the employee’s fault that their employment ended. Severance pay is not guaranteed by law, but many employers do offer it as a way to reduce the stress and financial impact of being let go from a company. Severance pay is typically taxed the same as a regular paycheck, with state and federal income taxes being deducted from the amount that is paid to an employee. If a severance package also includes compensation for unused vacation time or sick days, that amount is also considered taxable.
While the amount of severance pay can vary by employer, it is usually based on an employee’s salary and the number of years they have worked for the company. Some employers choose to use a formula, such as four weeks of pay for every year the employee has worked for the organization, while others may make it a flat rate based on an individual’s rank or position.
Companies may also include other items in a severance package, such as continued health insurance, career consultation services (also known as outplacement), the option to keep company equipment or stock options and other perks. In some cases, companies are obligated to offer outplacement support to former employees who were part of a large reduction-in-force, according to the Worker Adjustment and Retraining Notification Act, which requires companies to give advance notice when a company is laying off a significant number of workers.
Should I ask for severance pay?
In most instances, severance pay is taxable and must be reported to the IRS. However, it is important to consult with a tax professional about the specifics of your situation. You may be able to receive tax-free define severance pay if the company pays it as a lump sum and does not treat it as supplemental wages, which would result in regular withholdings from your paycheck. If the company treats severance pay as supplemental wages, you will need to calculate the total amount you will receive and then determine if you should have additional income tax withheld.
While you should always consult a tax professional, you should also consider contacting an employment attorney if you plan to negotiate the terms of your severance agreement. Some companies have a “take it or leave it” approach and won’t negotiate, while others will be more open to negotiations and could offer you a larger severance package in exchange for signing a non-compete or non-disclosure agreement.
Deciding whether to accept severance pay is a personal decision that comes down to your situation and the benefits it offers you. A severance package can provide a cushion while you look for a new job, but it can also limit your opportunities and impact your future earnings. If you are unsure about what is the best option for you, speak with a Northwestern Mutual financial advisor who can help you assess your options.