Severance taxed at higher rate?

[Free4Life11]

My office is shutting down in a few months. We are getting a severance, but they told us they have to tax it at a higher rate Apparently the government considers it a bonus? I think they said they take out 40% I was told changing my W4 will have no impact on this? This has got to be a joke, lose your job and they take 40% of your severance.

We aren't talking about astronomical sums of money here, 1.5 weeks of pay for every year of service...I'll get about $3000. Can I request an exemption? Is there anything I can do to reduce this tax rate? Employer says their no way to change this. There's get to be some loophole or way I can get around this. We are getting cut in April...any ideas?? Maybe I can put like 20 exemptions on my W4 so that they don't take out any taxes now through April (I'm single, no dependents)?

 

[glitterkittyy]

My office is shutting down in a few months. We are getting a severance, but they told us they have to tax it at a higher rate Apparently the government considers it a bonus? I think they said they take out 40% I was told changing my W4 will have no impact on this? This has got to be a joke, lose your job and they take 40% of your severance.

We aren't talking about astronomical sums of money here, 1.5 weeks of pay for every year of service...I'll get about $3000. Can I request an exemption? Is there anything I can do to reduce this tax rate? Employer says their no way to change this. There's get to be some loophole or way I can get around this. We are getting cut in April...any ideas?? Maybe I can put like 20 exemptions on my W4 so that they don't take out any taxes now through April (I'm single, no dependents)?

Yep, changing your W4 won't make a difference unless you claimed Exempt, which they probably won't let you and would have to report to the IRS (not worth it). By the way, any W4 with 10 or more exemptions on it also has to be reported to the IRS. It wouldn't matter, though, because exemptions don't count for supplemental rates.

They will take 28% federal, 7.65% FICA (SS & Medicare), plus your state rate and local rate (assuming you have it).

ETA: I had this happen when I was laid off, and I ended up OWING even after they took nearly $20k from me in federal taxes. I still owed $700! So be careful. Lump sum severances can sometimes put you into the next tax bracket. Unfair, but it can happen!

 

[ICF]

I would think though that any "extra" amount will go back to you when you file your 2009taxes a few weeks later.

While not having had a serverance before, I do know that Bonus and commission payments are taxed much higher than my regular pay.

 

[glitterkittyy]

I would think though that any "extra" amount will go back to you when you file your 2009taxes a few weeks later.

While not having had a serverance before, I do know that Bonus and commission payments are taxed much higher than my regular pay.

Any refund due wouldn't hit until 2010 filling, which would be in 2011. And you're not guaranteed to get it back at all...as with most things, it depends.

 

[disney1990]

When I received my severance, they didn't give it all at once. I received it every other week just like a paycheck so it was taxed like a paycheck. However, I also received a payout for my accrued vacation and it all came on one paycheck. Everybody checked their withholding to the max for that one paycheck so that it wouldn't all be taken away by taxes.

 

[rwdavis2]

I would have to assume that the higher rate only applies to that check. In the end you may get much of the taxes back as you pay income tax at a yearly rate and not per check.

For example a one-time lump sum bonus of 10,000 in a bi-weekly checks would work out to $260,000 annual income but if your salary is only $50,000 your year-end taxes are paid on $60,000. But I think you would get taxed on that one bonus check as if you made $260,000+ a year.

 

[ICF]

Any refund due wouldn't hit until 2010 filling, which would be in 2011. And you're not guaranteed to get it back at all...as with most things, it depends.

true...I missed that part that said it wouldn't be paid until 2010. I was thinking it said it would be paid in December.

 

[Free4Life11]

In the end you may get much of the taxes back as you pay income tax at a yearly rate and not per check.

I get that, but the point is I don't want to have to get it back as I'm going to unemployed and I can't tell my landlord I'll pay rent with an my 2011 tax refund, etc.

I guess there's no way out of this. I think I am going to just claim 7 or 8 on my W-4 so my taxes will be as low as possible until I get the boot and then the excessive taxes taken out on the severance should make up for that.

They can extend unemployment to 99 weeks but they think nothing of taxing a small severance at a ridiculous rate...I'll never understand the government.

 

[3boymthr]

And the bad part is they tax that entire amount as though it was one week's pay instead of say 8 weeks pay. So if your normal salary results in pay of $1,000 or $52,000/yr but you get a payment of $8,000 it's taxed at the level that you would be taxed at if you made $416,000/yr. I got a severance package when my company three times ago was bought out and the entire office was laid off - My package was for 9 weeks plus unused vacation of 3 weeks, but I ended up after taxes with making what worked out to be 4 weeks pay.

 

[Lisa loves Pooh]

This will be happening to us as well.

What I can tell you (not a tax person!)....

He had a bonus last year from his company. Taxed at the high rate....but when we did our taxes, it all remedied itself and for the first time in many years we got a tax refund.

So while they withhold at the higher rate, I Believe when you complete your actual taxes, it should "fix itself".

But I'm not an accountant and as far as I know--we did our taxes correctly.

 

[LindaG4458]

It seems like it's being unfair but it actually is looking out for you.

Suppose you got the large severance package and had taxes withheld as if it were multiple weekly checks. Then, a short time later, you got another job and had normal withholding on the weekly checks. Come income tax time you would owe a sizable amount because you would likely be in another tax bracket.

I was a payroll tax accountant in my last job and ran into this all of the time. People would moan and groan and complain but there is no way to get out of it.

 

[LuvCuteBoys]

While not having had a serverance before, I do know that Bonus and commission payments are taxed much higher than my regular pay.

No, taxes aren't based on what kind of pay it is. The withholding is higher, but the tax itself isn't. Same with the severance.

 

[manning]

If you are getting a lump sum it could be kicking you into a higher bracket. When you file you may get a refund.

 

[WalkingintheFog]

In Canada, a severance allowance (aka a retiring allowance) has the potential to be all/partly used to buy an RRSP. (registered retirement savings plan)

If the directions are given to the employer not to pay out to the employee, but to directly transfer to the institution where you'll purchase the RRSP, it's possible that they can do so without deducting income tax.
Or if the person requests a waiver from the taxman (in Canada, the IRA is called CRA) stating they intend to put the $$$ into an RRSP, they may be able to give an approval from the CRA advising Employer not to withhold taxes on the severance allowance, but to pay the full amount to the employee, who will put the $$ into RRSP(s)

There are conditions that need to be met.
And the income will still be reported on the Tax Return for that year, and any possible deductions claimed against that income.
Ultimately it will be taxed, but with RRSPs etc, it would be years down the road when the person starts drawing money out of the RRSP etc as retirement income-- years when their annual income is much lower and thus in a lower tax bracket.

Do you have similar rules in the States? Perhaps call the IRS to inquire?

Granted, if a person is just taking it as pay, and no intent to put any extra dollars into a registered retirement plan, then I don't think there's any mechanisn to reduce the withholding rate on it.
(I know you mentioned using it for rent payments....)

Good luck with it!

 

[nskjerven]

As a person that processes payroll I'd advise a person that I can follow the instructions that they give me on their W-4. Claim exempt and ask to have a specific amount of fed and state withheld (do you know what your withholdings need to be for this tax year with you unemployment included???)

Who cares if your payroll clerk has to submit your W-4 to the IRS??? If you are filing correctly then this is a no brainer.

Talk with your payroll department and or your tax preparer.