Severance Pay Considered Wages
As the economy struggles, more companies are laying off employees and offering them severance packages. The amount of severance pay offered depends on the employer’s policies and how long an employee worked for the company. Some companies may also provide outplacement services to help the former employee find another job. However, severance pay is not a requirement for employment and it can have significant tax implications.
severance pay is compensation that a company pays to an employee upon termination of their employment, and it may include other benefits such as extended health insurance or outplacement assistance. It is usually paid in addition to what an employee is owed from their remaining paychecks or unused vacation days. Companies can offer severance packages to employees who are laid off due to downsizing, those who retire or resign and those who are fired for misconduct. A severance package might include a lump sum of cash or other forms of compensation, such as stock options or restricted stock units.
In a recent case, the Massachusetts Supreme Judicial Court considered whether severance pay was considered wages. The company had offered severance payments to several of its employees in connection with the closing of their facility. The severance payments were not required by law and the company did not have a policy in place for paying them. However, the severance payments were included in the employee’s base-period earnings for purposes of determining eligibility for unemployment benefits.
Is Severance Pay Considered Wages?
It is common for a former employee to receive one to two weeks of severance pay for every year they worked at the company, although senior managers and executives might be offered more than this. Since severance pay is considered income, an employee can file for unemployment benefits, which is determined by the state in which they live. The Department of Labor has guidelines that an employee must meet in order to qualify for unemployment benefits, and this will vary from state to state. An individual should contact their state’s unemployment agency for more information and to see if there are any special requirements in their area.
The severance pay an employee receives is considered to be part of their regular wages, so it is subject to normal withholding for income taxes (federal and state income taxes based on their W-4, Social Security and Medicare taxes), federal and state FICA taxes, workers’ compensation insurance premiums, and any other payroll taxes that are applicable to their wages. If the severance pay is paid in a lump sum, it could be taxed at a higher rate than regular wages, which may push an individual into a different income tax bracket. Therefore, it is important for an individual to consult with a severance pay lawyer about how to best structure the severance payment to avoid the possibility of having to pay a large tax bill at a later date.
It is also possible for an employee to negotiate severance pay in installments rather than a lump sum. This way, the tax bite is spread out over a period of time and it does not impact an employee’s ability to apply for unemployment benefits.