What is Severance pay?
Severance pay is compensation an employer provides upon involuntary termination, typically calculated based on length of service as a set number of weeks of salary. The IRS classifies severance as supplemental wages subject to federal income tax withholding, Social Security, and Medicare, and employers report payments on Form W-2. Recipients must include the full amount as taxable ordinary income on their annual tax return. Strategic timing of severance payments across tax years and maximizing Traditional 401k contributions before separation can reduce tax burden during career transitions.
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