Why the Severance Check Looks More Taxed Than Your Paycheck

The IRS treats severance pay as a supplemental wage — the same category as a bonus or accrued-vacation payout — rather than regular wages. An employer may withhold federal income tax on it at a flat percentage set by IRS rule, instead of running it through the graduated withholding tables your regular salary uses. That flat rate is frequently higher than an employee's actual marginal bracket, which is why a severance check often looks more heavily taxed than a normal paycheck of the same size — the withholding is not the final tax bill, and any excess is reconciled at filing.

Because supplemental-wage withholding is a flat percentage rather than a calculation of your actual liability, a severance payment can be over-withheld or under-withheld relative to your real annual tax bill depending on your total income for the year. Either way is corrected when the return is filed: an over-withheld amount comes back as part of a refund, an under-withheld amount is owed with the return (and can trigger an estimated-tax underpayment question if the shortfall is large). Nothing about severance withholding is a final answer on its own.