Employers should input the income amount that they provided for an employee in severance pay on a Form W-2. Report this payment amount as wages in box 1, which means that you must add it to the annual W2 income total.
The Internal Revenue Service finds severance pay taxable during the year that an employee receives it. Withhold the appropriate amount of federal and state taxes from each employee receiving a severance payment from your business. Subject any of the severance payments that you give to both:
- Social Security taxes
- Medicare taxes
Remember that the IRS considers the severance pay as a supplemental wage. Other wages like that are bonuses or retroactive pay increases. In 2025, employers continued to generally withhold federal income tax at a flat rate of 22% for these types of payments.
People Also Ask
- Should I also report severance pay in boxes 3 and 5 of a W2 form? – Yes, because the employee’s severance pay is generally subject to FICA taxes. Make sure to include the pay where you report Social Security wages (box 3) and Medicare wages (box 5).
- Will severance pay affect an employee’s unemployment benefits? – Yes, severance pay can influence an employee’s eligibility or benefit amounts in many states. Reviewing the rules of each state is important for clarity.
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