Question for accounting/tax people.

[K-town Vol Fan]

My wife recently lost her job, she was a store manager for a large retail chain that, unfortunately, Covid was the nail in the coffin for. She received 9 weeks severance pay in a lump sum. We assumed this would be taxed like a regular paycheck, however, it was taxed as a bonus and uncle sam took 30% of her pretty large severance that we were not planning for. Is this the norm for severance pay?

 

[UT_VOLS13]

My wife recently lost her job, she was a store manager for a large retail chain that, unfortunately, Covid was the nail in the coffin for. She received 9 weeks severance pay in a lump sum. We assumed this would be taxed like a regular paycheck, however, it was taxed as a bonus and uncle sam took 30% of her pretty large severance that we were not planning for. Is this the norm for severance pay?

Yes, they paid the severance out correctly. Severance payments are classified as “supplemental wages,” which have their own tax policies. Employers are required to withhold 22% of the severance wages and pay the money to the IRS.

 

[Firebirdparts]

It's only the witholding that is odd. It's taxed as regular income. After your tax return it won't make any difference.

 

[K-town Vol Fan]

Yes, they paid the severance out correctly. Severance payments are classified as “supplemental wages,” which have their own tax policies. Employers are required to withhold 22% of the severance wages and pay the money to the IRS.

Any reason they would withhold 30%?

Thanks for the response.

 

[Thunder Good-Oil]

Any reason they would withhold 30%?

Thanks for the response.

30% just the Federal withholding or does that include the 7.65% FICA?

 

[UT_VOLS13]

30% just the Federal withholding or does that include the 7.65% FICA?

It is both.

 

[UT_VOLS13]

Any reason they would withhold 30%?

Thanks for the response.

Employees and employers both pay a 6.2% Social Security tax and a 1.45% Medicare tax on a person’s wages. These taxes are known as FICA, payroll, or employment taxes.

22+6.2+1.45=29.65

 

[Thunder Good-Oil]

It is both.

22% plus 7.65% rounds up to 30%. The 22% is an estimate withheld and if your actual tax rate ends up being less, then you’ll have a refund when you file the 2020 return.

 

[UT_VOLS13]

22% plus 7.65% rounds up to 30%. The 22% is an estimate withheld and if your actual tax rate ends up being less, then you’ll have a refund when you file the 2020 return.

Correct

 

[Thunder Good-Oil]

Correct

You answered my question for KTVF. Never mind my including “you” in my reply.

 

[K-town Vol Fan]

Thanks guys. Appreciate the knowledge