Does a company take out taxes on a lump sum severance?

Question

Will my company take the taxes out of my severance?

I'm just trying to figure out how much I will actually get from my severance. In my release, it states:

"The Company will pay you a lump-sum payment of xxxx..."

and then goes on to say in another paragraph:

"You are solely responsible for any and all tax obligations or other obligations under federal and/or state law pertaining to the receipt of the additional compensation in this release, and you hereby agree to hold the Company harmless from any and all liability relation to such obligations"

So does this mean that I will receive the full lump sum payment, or the lump sum payment - taxes?

Answer 1

In the US, the IRS requires employers to withhold taxes on severance pay. This is explained in guidance issued in 2008:

Situation 6. Severance pay is supplemental wages because it is not a payment for services in the current payroll period but a payment made upon or after termination of employment for an employment relationship that has terminated. Thus, although the payments in this situation are for a fixed determinable amount for 51 weeks, they are not fixed payments for the current payroll period and thus are not regular wages.

Because the severance pay is supplemental wages, the usual rules for determining income tax withholding with respect to supplemental wages apply. S can use the aggregate procedure to determine withholding on the payments. Alternatively, if S has withheld income tax on regular wages paid to G in Year 1, S can use optional flat rate withholding to determine the withholding with respect to the supplemental wage payments in Year 1 and Year 2.

This means the employer may either withhold 25% flat, or may withhold by the usual method (similar to your regular withholding). As of 2014, severance pay was ruled to also require withholding of FICA taxes, as your normal wages have withheld from them.