How is severance pay calculated?
There's no federal law requiring severance, so the formula comes from your employer's policy or your individual agreement — most commonly one to two weeks of pay for every year of service. Ten years at a company with a two-weeks-per-year policy means 20 weeks of pay. Executives and negotiated exits can get far more. Whatever the number, check whether it's based on base salary alone or includes bonuses and commissions, because that distinction is worth real money.
Estimate your package with the Severance Pay Calculator before you start negotiating — knowing your number changes the conversation.
The standard formulas
Most US employers use one of these structures:
Weeks per year of service. The classic: 1–2 weeks per year, sometimes with a cap (e.g., max 26 or 52 weeks). A 6-year employee at 2 weeks/year gets 12 weeks — roughly three months of pay. Some companies tier it: 2 weeks per year for the first five years, then 1 week per year after.
Flat amounts by level. Common in tech and finance: individual contributors get 8–12 weeks regardless of tenure, managers get 12–16, directors more. Tenure matters less than your band.
What counts as "pay" is where the details get expensive. Base salary is always included. But bonuses, commissions, RSU vesting, and unused PTO vary wildly by policy. Someone with a $120k base and a 20% target bonus has $144k in real compensation — if severance is computed on base alone, they're leaving $24k/year of value on the table. Read the actual policy document, not the HR summary email.
The 22% tax surprise
Here's the part that blindsides people: severance is taxed as supplemental wages, and employers are required to withhold a flat 22% for federal taxes on the first $1 million (37% above that). This withholding is *not* your actual tax rate — it's just a prepayment, settled when you file.
Why does this matter? Two scenarios:
If your normal marginal rate is 24% or higher, the 22% withholding is roughly right, maybe slightly short. No drama.
But severance often lands in a year when your income *drops* — you were laid off in March, you earn little the rest of the year. Your actual marginal rate might be 12%. The employer still withholds 22%. You've just given the IRS an interest-free loan until refund season. It's not lost money, but it stings when cash is tight.
What you can negotiate (more than you think)
The first offer is rarely the last offer, especially if you have any leverage at all — a potential legal claim, deep institutional knowledge, or just an employer that wants a clean, quiet exit. Things people successfully negotiate:
More weeks. The most common win. Asking "can you do three weeks per year instead of two?" works more often than people expect, particularly for long-tenured employees. The worst they say is no.
Extended health coverage. COBRA is brutally expensive (often $600–$1,500/month for family coverage). Getting the employer to cover 3–6 months of COBRA premiums is frequently easier for them than extra cash — it's a smaller line item on their books but huge for you.
The termination label. "Laid off" vs "mutually separated" vs "terminated" affects unemployment eligibility and background checks. Get the agreed language in writing.
Non-compete and non-disparagement terms. Read these like your career depends on it, because it might. A 12-month non-compete in your industry can cost you far more than the severance pays. Push to narrow the scope, shorten the duration, or drop it entirely. And make the non-disparagement mutual — they shouldn't get to badmouth you either.
Before you sign anything
Don't sign on the spot. If you're over 40, federal law (the OWBPA) actually *requires* they give you at least 21 days to consider a severance agreement (45 days in group layoffs) plus 7 days to revoke after signing. Even if you're under 40, ask for time. "I need a few days to review this properly" is always reasonable.
Understand what you're waiving. Nearly every agreement includes a general release — you're giving up the right to sue over anything related to your employment. If you have even a whisper of a discrimination, harassment, or retaliation concern, that waiver is worth real money and you should not sign it without counsel.
File for unemployment immediately. Don't wait until severance runs out. In many states there's a waiting week, and the clock starts when you file, not when you need the money.
Roll the emotions forward, not the decisions. The agreement will still be there tomorrow. Sleep on it. The leverage you think you lose by waiting is almost always imaginary; the mistakes you make by rushing are very real.
Frequently asked questions
Is severance pay required by law?
Generally, no. No federal law requires private employers to offer severance — it's a matter of company policy, employment contracts, or collective bargaining agreements. The exceptions: the WARN Act's 60-day notice-or-pay rule for mass layoffs, and any severance promised in your offer letter or employment contract, which is enforceable. Some states have mini-WARN laws with broader coverage.
How long does it take to receive severance after signing?
Typically 2–4 weeks after the agreement becomes effective (after any revocation period expires). Lump sums arrive faster; salary continuation is paid on the normal payroll schedule. If it's been over a month, follow up in writing — and keep a copy of the signed agreement somewhere you can find it.
Does severance affect unemployment benefits?
It depends on your state, and the rules are genuinely all over the map. Some states (like California) let you collect both simultaneously. Others reduce unemployment dollar-for-dollar while severance is being paid, or treat lump-sum severance differently from salary continuation. Check your state's unemployment agency site before assuming either way — and file the claim regardless; the agency will sort out the offset.
Should I take the lump sum or salary continuation?
Lump sum gives you control — invest it, use it, it's yours. But it can spike you into a higher tax bracket for the year and usually ends your health coverage immediately. Salary continuation keeps benefits running and spreads the tax hit, but you're still tied to the company's payroll and they can have strings attached.
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