2026 · the myth
Is severance taxed at a higher rate?
Short answer: no. It's withheld differently, a flat 22%. But taxed as ordinary income at your normal rates. Those are two different things.
The belief that severance is "taxed higher" comes from the withholding. Because severance is supplemental wages, an employer withholds a flat 22% federally (37% on any amount over $1 million) when it's paid on its own. That flat 22% often looks bigger than the tax withheld from a normal paycheck. But withholding is a prepayment, not the tax. At filing, your severance is taxed as ordinary income at the same brackets as everything else, and you settle up.
The proof: same severance, opposite outcomes
A single filer, $40,000 severance, no state income tax, the only thing that changes is other income:
| Other income | Withheld (22%) | Actual tax | Result at filing |
|---|---|---|---|
| $20,000 | $8,800 | $4,630 | refund ≈ $4,170 |
| $400,000 | $8,800 | $14,000 | owe ≈ $5,200 more |
Same $40,000, same $8,800 withheld. But the lower earner gets money back and the higher earner owes more. If severance were genuinely "taxed higher," the low earner wouldn't get a refund. The 22% is just a flat withholding rate that happens to over- or under-shoot your real rate.
Counts toward the $184,500 Social Security cap.
Wages, new job, spouse, sets your real tax rate.
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Questions
So why does it feel like more is taken out?
Because the 22% flat rate is often higher than the effective rate withheld from your regular paycheck (which accounts for your allowances and lower brackets). More is withheld up front, but it's credited against your real tax at filing, you get the excess back.
Can I avoid the 22% over-withholding?
If severance is paid with your final paycheck, the aggregate method applies instead, which lands closer to your real rate. You can't change the flat rate on a separate payment, but you'll reconcile it at filing regardless.
Work it out
- Severance pay tax calculator your net check and real liability
- Lump sum vs installments
- Layoff runway
Estimate for the 2026 tax year. Nothing you enter is stored. Not tax advice.