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Say a former employer pays out a lump-sum severance, and say that payment has taxes withheld at a higher than normal rate. Will the difference between that tax amount and my regular payroll tax rate be refunded when I file my return for the year?

In other words, will the lump-sum payment be taxed as though it had been paid out over a series of payroll deposits instead of a the higher rate? How is such a payment reported to the IRS by an employer, and how will I report it on my return?

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    One important clarification. The money isn't taxed at a higher rate. It is taxed at your normal income rate. What you are talking about is how much is withheld, which is a different thing.
    – JohnFx ♦
    Oct 19, 2018 at 20:01
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    Though if this payment is more than normal by enough to push your total income into a higher bracket, the part in the higher bracket is taxed at a higher rate. Also you appear to be asking about, and definitely everyone is answering and commenting about, income tax. Payroll taxes (plural) also include Social Security and Medicare and (usually) Unemployment Insurance, and those are always flat rate up to a low cap for UI, a cap of about $120k for SS, and no cap for Medicare. You only get SS refunded if you work for multiple employers and the combination puts you over the cap.
    – dave_thompson_085
    Oct 19, 2018 at 21:55

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Withholding is always based on an estimate of what your taxes due will be. Lump sum payments like bonuses and severance are often subject to excessive withholding because the payroll system may estimate that the larger payment will be typical of other payments you'll receive, which of course it isn't.

With a bonus, you often get this back through the rest of the year. The payroll system sees that you didn't get that bonus again next month and the month after that and withholds less than it usually would. However, this isn't going to be possible with a severance payment. And, of course, your next employer won't know that your previous employer withheld a bit too much.

Your employer will report the lump payment to the IRS the same way it reports all other payments to you. At the end of the year, you will receive a W2 from your employer that includes what they paid you and what they withheld. If the withholding actually turns out to be excessive, the amount withheld will exceed the amount you owe and you will receive a refund.

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    Yes. The IRS does not care when in the year you received the money (except sometimes with estimated tax payments), just the yearly total.
    – jamesqf
    Oct 19, 2018 at 17:13
  • I agree with gist of the answer. I do have a problem with the middle paragraph. Each paycheck is viewed standalone. So if the withholding on paycheck A was $200, and the bonus meant that the withholding for check B is $400. If the pay for check C goes back to the pay level of A, then the withholding will return to $200. There is no adjustment for the overage on check B. They don't decide to only withhold $180.
    – mhoran_psprep
    Oct 19, 2018 at 21:08
  • @mhoran_psprep Maybe the companies that I've been paid by do things differently. But when I've gotten additional pay one month, the withholding seems to be based on me getting that additional pay every month and when I don't get that additional pay the next month, it's been partially leveled out. It's possible I assumed that my atypical experiences are common.
    – David Schwartz
    Oct 20, 2018 at 0:48

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