Quick Answer
Golden handshake severance packages are taxed as ordinary income, typically at your highest marginal rate. A $500,000 severance package could result in federal taxes of $185,000-$200,000 (37% bracket) plus state taxes, with mandatory 22% federal withholding on amounts over $1 million in supplemental wages.
Best Answer
Sarah Chen, Payroll Tax Analyst
Employees receiving standard severance packages under $1 million
How golden handshake severance is taxed
Golden handshake severance packages are taxed as ordinary income in the year you receive them, not as capital gains. This means they're subject to federal income tax rates up to 37%, plus state income tax where applicable. The entire amount is also subject to Social Security and Medicare taxes (FICA), though Social Security tax only applies to the first $176,100 of combined wages and severance in 2026.
According to IRS Publication 15-A, severance payments are classified as "supplemental wages" and are subject to special withholding rules that often result in significant tax surprises.
Example: $300,000 severance package
Let's say you earned $120,000 in salary this year and receive a $300,000 golden handshake severance:
Federal tax calculation:
FICA taxes:
Withholding vs. actual tax:
Your employer will likely withhold 22% federal tax (supplemental wage rate) = $66,000, but your actual tax liability is much higher at $105,000, creating a $39,000 shortfall you'll owe when filing.
Key factors that affect taxation
What you should do
1. Calculate estimated taxes immediately using the total income including severance
2. Make quarterly estimated tax payments if withholding is insufficient
3. Consider timing strategies like deferring other income or accelerating deductions
4. Maximize retirement contributions if eligible for current year limits
5. Consult a tax professional for packages over $200,000
Use our paycheck calculator to estimate the tax impact of your severance package and plan accordingly.
Key takeaway: Severance packages are taxed as ordinary income at your highest marginal rate, often resulting in 35-50% total tax rates when including federal, state, and payroll taxes.
*Sources: IRS Publication 15-A (Employer's Supplemental Tax Guide), IRC Section 3401*
Key Takeaway: Severance packages are taxed as ordinary income at your highest marginal rate, often resulting in 35-50% total tax burden when including federal, state, and payroll taxes.
Federal tax withholding vs. actual liability on severance packages
| Severance Amount | Federal Withholding | Actual Tax Liability* | Shortfall/Overpayment |
|---|---|---|---|
| $100,000 | $22,000 (22%) | ~$35,000 (35%) | $13,000 shortfall |
| $500,000 | $110,000 (22%) | ~$185,000 (37%) | $75,000 shortfall |
| $1.5 million | $405,000** | ~$555,000 (37%) | $150,000 shortfall |
More Perspectives
Marcus Rivera, Compensation & Benefits Analyst
Executive-level employees receiving large severance packages over $500,000
Special considerations for executive severance
High-earning executives face additional complexity with golden handshake packages, particularly around the $1 million supplemental wage threshold and potential golden parachute rules.
Million-dollar withholding rule: According to IRS regulations, if your severance exceeds $1 million, your employer must withhold 37% federal tax (top marginal rate) on the amount over $1 million, while the first $1 million is withheld at 22%.
Example: $2 million executive severance
Assume you earned $300,000 in base salary plus a $2 million severance:
Withholding breakdown:
Actual tax liability:
Key strategies for executives:
1. 280G golden parachute analysis: Payments over 3x average compensation may trigger 20% excise tax plus loss of deduction for employer
2. Installment planning: Negotiate to spread payments across tax years if possible
3. Charitable giving: Large charitable deductions can offset some of the income impact
4. State domicile planning: Consider timing of state residency changes
Key takeaway: Executive severance over $1 million triggers higher withholding rates and may involve golden parachute penalties, requiring sophisticated tax planning.
Key Takeaway: Executive severance over $1 million triggers 37% withholding on excess amounts and may involve golden parachute penalties requiring sophisticated tax planning.
Sarah Chen, Payroll Tax Analyst
Remote employees who may have worked in multiple states during their employment
Multi-state severance taxation challenges
Remote workers receiving severance face complex state tax allocation issues, especially if you've worked in multiple states or moved during your employment period.
State allocation rules: Each state has different rules for taxing severance. Some states tax based on where you performed services, others on your residence when you receive payment, and some use a combination approach.
Example scenarios:
Scenario 1: Moved during employment
You worked 3 years in California (high-tax state) then moved to Texas (no income tax) before receiving $400,000 severance.
Scenario 2: Remote work across state lines
Lived in New Jersey but worked remotely for NYC company:
Key planning strategies:
1. Document work location history to support allocation arguments
2. Review reciprocity agreements between relevant states
3. Consider timing of state residency changes relative to severance payment
4. File protective claims in multiple states if necessary
Key takeaway: Multi-state remote workers may face complex allocation rules and potential double taxation on severance, requiring careful documentation and planning.
Key Takeaway: Multi-state remote workers may face complex state allocation rules and potential double taxation on severance, requiring careful documentation of work locations and residency changes.
Sources
- IRS Publication 15-A — Employer's Supplemental Tax Guide - Severance Pay Rules
- IRC Section 3401 — Definitions for Employment Tax Withholding
Related Questions
Reviewed by Sarah Chen, Payroll Tax Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.