What Is Severance Pay?

Q: Is severance pay required by law?

In the United States, there is no federal law requiring employers to provide severance pay. Severance is typically offered as a matter of company policy or as part of an employment contract. However, some states have specific requirements, and the WARN Act may create an obligation to pay wages for the notice period if proper notice is not given.

Q: Is severance pay taxed?

Yes. Severance pay is treated as ordinary income and is subject to federal and state income taxes, as well as Social Security and Medicare (FICA) taxes. Employers typically withhold taxes before disbursement. When entering severance into a runway calculator, use the net after-tax amount for an accurate picture.

Severance pay is a one-time payment from an employer to an employee upon involuntary termination — typically calculated as 1–2 weeks of salary per year of service — that extends the employee's financial runway after job loss.

Definition

Severance pay is compensation provided to employees who are laid off, as opposed to those who resign or are fired for cause. It is distinct from the final paycheck (which covers hours worked) and is typically paid as a lump sum or continued salary over a defined period.

In the US, severance is not required by federal law. It is offered at employer discretion, through company policy, or via employment contracts — particularly at larger companies where severance packages are used to secure a signed release of legal claims. During a mass layoff at a tech company, for instance, severance of 2–4 weeks per year of service plus benefits continuation is common.

The terms of a severance agreement may include a non-disparagement clause, a non-compete agreement, or a release of all employment-related claims. If you're offered severance, you typically have 21 days to review it and 7 days to revoke after signing. Consulting an employment attorney before signing is advisable if the amount is significant.

How It Affects Your Financial Runway

Severance pay adds directly to the numerator of the runway formula — it joins your liquid savings to form the total cash available to cover expenses. A $15,000 severance package at a $3,000/month burn rate adds 5 months to your runway, with zero change to your lifestyle.

Enter severance as the net after-tax amount in a runway calculator. Severance is taxable income, so a $20,000 package may net $13,000–$15,000 after federal and state withholding.

Worked Example

8 years of service × 2 weeks/year × $2,308/week ($60,000 salary ÷ 52) = $36,928 gross severance. After roughly 30% tax: ~$25,850 net. Added to $18,000 in savings = $43,850 total.

Runway = $43,850 ÷ $3,900/mo = 11.2 months

Without the severance, runway would be only 4.6 months — the severance more than doubled it.

Frequently Asked Questions

Is severance pay required by law in the US?

No federal law requires severance pay. It is offered at employer discretion or per employment contract. However, if your employer is subject to the WARN Act and fails to give 60 days notice of a mass layoff, they may owe you pay in lieu of notice — which functions like severance.

Is severance pay taxed?

Yes — severance is treated as ordinary income and is subject to federal and state income taxes plus FICA. Employers typically withhold before paying. Use the net after-tax amount in your runway calculator for an accurate result.