Severance Optimizer

Yes. Severance is treated as ordinary income and taxed at your marginal federal income tax rate, plus state income tax and FICA (Social Security and Medicare up to the annual wage base). Employers typically withhold at a flat 22% supplemental rate — or 37% for any single payment over $1 million — but your actual liability is determined at tax filing based on your total annual income. If withholding is too high, you get a refund; if too low, you owe. The calculator above estimates your federal income tax only — state taxes, FICA, and any deductions are not included.

Almost always. If you were laid off (not fired for cause), your employer has already decided to pay something — the first offer is rarely their best. Common items to negotiate: additional weeks of pay, extended benefits coverage, accelerated equity vesting, outplacement services, and a narrower non-compete. Under the Older Workers Benefit Protection Act (OWBPA), any severance agreement that includes a release of age discrimination claims must give you at least 21 days to consider it (45 days in a group layoff) and 7 days to revoke after signing. Use every day of that window.

It depends on your state and how severance is paid. In most states, lump sum severance does not affect unemployment eligibility — you can file the week after your layoff. Salary continuation (ongoing weekly pay) often delays or reduces UI benefits because the state treats it as wages for those weeks. Check your state's unemployment agency rules before choosing a payout structure. In some states (California, for example) even lump sum severance may be prorated.

Lump sum pays your entire severance at once, usually within 30 days of signing. Salary continuation pays your normal paycheck on the same schedule for the severance period. Lump sum gives you the money faster, is not at risk if you find a new job (many continuation agreements claw back remaining weeks when you start a new role), and lets you put the money to work immediately. Salary continuation may push some income into the next tax year, potentially reducing your overall tax bill if you expect lower income next year — the calculator above models both scenarios.

A layoff is a COBRA qualifying event regardless of how severance is paid. You have 60 days from losing coverage to elect COBRA (coverage is retroactive if elected within that window). If your employer offers benefits continuation as part of severance, your COBRA eligibility clock typically starts when that employer-paid coverage ends, not on your last day of work. Check your COBRA election notice carefully — the coverage end date is often the last day of the layoff month, not your actual last workday. Compare COBRA vs ACA Marketplace costs with the COBRA vs ACA Calculator.

Not directly — severance is earned compensation, not a retirement distribution, so it cannot be rolled over into an IRA or 401(k). However, if you land a new job while receiving salary continuation, you may be able to contribute up to the 2025 annual 401(k) limit ($23,500; $31,000 if 50+) from your paycheck, which effectively shelters some severance income. You can also contribute to a traditional or Roth IRA up to the annual limit ($7,000 in 2025; $8,000 if 50+) from any earned income, including severance.

The most common formula is one to two weeks of base pay per year of service. A five-year employee might receive 5–10 weeks. Senior roles often see 2–4 weeks per year of service at director level and above. Most packages also include a COBRA subsidy or a period of benefits continuation, and sometimes outplacement services. There is no federal law requiring severance — it is entirely employer-determined and negotiable. Your employer's severance policy, if any, is often documented in your offer letter or employee handbook.