Company Size Impact Severance Pay
The amount of severance pay a company offers depends on its size and the state laws where it does business. For example, smaller companies may not be required to offer severance pay, while larger employers must follow the WARN Act, which requires that they provide 60 days’ notice before laying off employees. Severance pay is typically based on the number of years an employee has worked at the company, with one or two weeks of salary for each year being the most common. Middle managers and executives may receive more than that.
In addition to salary, a severance package can include nonfinancial benefits, such as continued insurance coverage (often called COBRA) and career consultation services (“outplacement”) to help former employees find new jobs. The latter is often more valuable than additional cash, because it can save an individual a lot of money over the long term.
As a lump-sum payment, severance pay is taxed like normal wages. This means the same federal income tax withholding that applies to your normal paycheck (based on your completed W-4) will apply, and you’ll be subject to Social Security and Medicare taxes, as well. However, if your employer chooses to treat your severance payments as a retiring allowance, you may be subject to a flat 22% tax rate instead of the regular withholding rate that normally applies to your wages.
How Does Company Size Impact Severance Pay?
Severance packages can also include unused vacation and sick leave, or even stock options. Companies can get creative in designing a package that reflects the unique needs of their organization and their workforce. The severance pay you receive is up to the company, but it’s best to negotiate in good faith with your former employer. If your severance package includes a large sum that would push you into a higher tax bracket, consider asking to have the lump-sum amount paid over two years to reduce the tax bite.
A retiring allowance, also known as a severance package or golden handshake, is a lump-sum payment made by an employer to an employee upon retirement. This payment serves various purposes, including recognizing years of service, assisting with the transition to retirement, and providing financial security for the retiree.
It’s important to remember that severance pay is not required by law, and it might not be offered if you’re fired for serious misconduct such as absenteeism or failing a drug test. However, severance pay is a way for companies to show that they’re concerned about the impact of layoffs on their workers and want to make the transition as smooth as possible.
If you don’t receive severance pay, be sure to build a healthy emergency fund so that you can cover expenses without impacting your long-term financial goals. And if you’re facing an unexpected job loss, your Northwestern Mutual financial advisor can help you develop strategies to deal with the transition that don’t put your long-term financial plan at risk.
