How Is Severance Pay Taxed?

Severance Pay Taxed

In the wake of recent layoffs at big technology companies, many people may be wondering whether they’re entitled to severance pay. While companies aren’t legally required to offer severance packages or to make the payments in proportion to years of employment, they do it to defuse tension among laid-off workers and give employees some financial security as they search for new jobs.

severance pay is taxable the same as any other income. Your employer may withhold taxes from your severance package, or you can choose to have it deposited into an RRSP or RPP (in which case, taxes will be deducted when you withdraw funds). If your employer pays your severance as what the IRS calls supplemental wages, it will be included in the total amount of income listed on your W-2 at the end of the year.

Some companies also include a package of benefits with severance pay, such as continued insurance coverage, career consultation services (sometimes called outplacement), employee discounts or even the option to keep company equipment like a cell phone. Others offer a lump-sum payout of unused vacation or sick days or other paid time off. These additional benefits can significantly boost the value of a severance package.

How Is Severance Pay Taxed?

While most severance pay is offered as a lump sum, it can sometimes be rolled into a retirement or pension plan. If you’re enrolled in a defined contribution or profit-sharing plan, provisions in your plan’s documentation should detail how the money will be distributed upon termination.

The type of bonus you’re owed can influence the value of your severance package, but it isn’t always factored into the calculation. Performance-based bonuses, for example, are typically taxable as normal wages. However, a bonus that’s tied to your performance may be rolled into your severance pay Ontario package as long as it doesn’t exceed the minimum wage.

If you’re a member of a union, your severance package will likely be subject to deductions for pension and health care contributions. The exact amounts will depend on your bargaining unit and the rules set by your collective agreement.

No matter how much severance you’re owed, it can be stressful to lose your job and find a new one. You can use your severance package to cover expenses during this transition period, but it’s important to maintain emergency savings as well. A Northwestern Mutual financial advisor can help you develop a strategy for making ends meet without impacting your long-term goals. In the event that your employer terminates you unfairly and doesn’t pay you the right amount of severance, contact our firm to see what options are available for pursuing legal action against them. Our Toronto wrongful dismissal lawyers can help you determine if you’re eligible for compensation. We can also assist you in negotiating with your employer to get the severance package you deserve. Call us today to get started.

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