# Taxed at a Different Rate? **URL:** \ **Category:** Factual Questions\ **Created:** [March 18, 2017, 2:04am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460 "2017-03-18T02:04:42Z")\ **Posts on this page:** 11\ **Page:** 1
**Author:** ![Jinx](https://avatars.discourse-cdn.com/v4/letter/j/c6cbf5/32.png) [@Jinx](https://boards.straightdope.com/u/Jinx)\ **Post date:** [March 18, 2017, 2:04am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/1 "2017-03-18T02:04:42Z")
I just received severance pay for which the Feds took like 40%. If I have a W-4 that tells an employer how much to take out of my regular paychecks, how does this affect things like severance pay which is taxed at a different rate? And, how do I know if the right amount was taken out to avoid penalties? Last, is there a special 1099 for severance pay? ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [March 18, 2017, 2:22am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/2 "2017-03-18T02:22:40Z")
You are going to have to talk to a tax specialist like a CPA to know the exact answer but there is a big difference between tax withholding and your true tax burden. You will just get the money back when you file next year if you overpaid. 40% is really high so I think it is unlikely that there will be any penalties. Was that really all federal income tax or did it include state and other taxes? Typically, severance pay is taxed at the same rate as your employee wages. The full answer is complicated but it largely depends on your state. In no case should there be a federal tax rate of literally 40% because no one in the U.S. has a federal tax rate that high. It has to be a mix of other taxes. That doesn’t mean that your former employer calculated the tax deduction correctly but it also doesn’t mean that you can’t get some of it back if they made a mistake. [https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/howdoesalump-sumseverancepayaffectunemploymentbenefitvspayspreadoutoverafewpayperiodsandtaxs.aspx](https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/howdoesalump-sumseverancepayaffectunemploymentbenefitvspayspreadoutoverafewpayperiodsandtaxs.aspx) ---
**Author:** ![DSYoungEsq](https://avatars.discourse-cdn.com/v4/letter/d/c6cbf5/32.png) [@DSYoungEsq](https://boards.straightdope.com/u/DSYoungEsq)\ **Post date:** [March 18, 2017, 4:14am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/3 "2017-03-18T04:14:36Z")
The amount that will come out of your severance pay for taxes may differ from the “normal” rate, because the severance pay may have been a higher total than an average paycheck. The percentage amount withheld for FIT (and SIT, usually) is increased for higher rates of pay because the federal income tax is progressive: the more you earn, the higher the effective overall rate will be. Without getting into too much complication, when figuring withholding on a given paycheck, the company will assume you are earning that paycheck for an entire year’s worth of paychecks, and withhold accordingly. So if you suddenly get a significantly increased check (bonus, severance pay covering more than one normal check’s period, etc.), the withholding will be based on the assumption that you would get that amount for an entire year’s worth of paychecks. As noted by **Shagnasty** , it’s irrelevant to the overall tax owed at the end of the year; it just increases the likelihood of getting a refund, and increases the amount of that refund. ---
**Author:** ![Snnipe\_70E](https://avatars.discourse-cdn.com/v4/letter/s/b5a626/32.png) [@Snnipe\_70E](https://boards.straightdope.com/u/Snnipe_70E)\ **Post date:** [March 18, 2017, 6:33am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/4 "2017-03-18T06:33:04Z")
There will be no 1099 for severance pay. The severance pay will be included on your W-2 form. If they over withheld you will get a larger return. If they under withheld normally there will be no penalty, you will just have to pay on your next tax filling. ---
**Author:** ![thelurkinghorror](https://avatars.discourse-cdn.com/v4/letter/t/7c8e57/32.png) [@thelurkinghorror](https://boards.straightdope.com/u/thelurkinghorror)\ **Post date:** [March 18, 2017, 7:28am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/5 "2017-03-18T07:28:32Z")
Supplemental wages including severance, bonuses, commissions, etc. are withheld at 25%. Their tax is determined the next April 15, so you may get some of it back, depending. ---
**Author:** ![Hari\_Seldon](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hari_seldon/32/5173_2.png) [@Hari\_Seldon](https://boards.straightdope.com/u/Hari_Seldon)\ **Post date:** [March 18, 2017, 6:05pm UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/6 "2017-03-18T18:05:03Z")
Here is my wag. Let’s imagine that you got six months income and it totalled $35,000 (just made that up). Then the employer, his tax program, or whatever, probably withheld at the appropriate rate for some earning $35,000 per month, or week, or whatever you usual pay period is. Obviously, that will result in high withholding. ---
**Author:** ![watchwolf49](https://avatars.discourse-cdn.com/v4/letter/w/e9c0ed/32.png) [@watchwolf49](https://boards.straightdope.com/u/watchwolf49)\ **Post date:** [March 18, 2017, 10:42pm UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/7 "2017-03-18T22:42:56Z")
40% tax doesn’t seem all that much if that includes all taxes … 25% Federal income tax plus 7.5% SS tax and another 7.5% State income tax … and like pointed out above … withholding taxes are just estimates, once you have your tax returns filled out, then everything is squared … ---
**Author:** ![glowacks](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/glowacks/32/5548_2.png) [@glowacks](https://boards.straightdope.com/u/glowacks)\ **Post date:** [March 20, 2017, 2:01am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/8 "2017-03-20T02:01:21Z")
> [@Jinx](#): > > I just received severance pay for which the Feds took like 40%. If I have a W-4 that tells an employer how much to take out of my regular paychecks, how does this affect things like severance pay which is taxed at a different rate? And, how do I know if the right amount was taken out to avoid penalties? Last, is there a special 1099 for severance pay? Others answered the other questions. But as to penalties, you will avoid them even if you underpay through withholding and estimated tax if: 1. You underpay by less than $1,000. 2. You underpay by 10% or less. 3. You paid at least what your total tax was last year. If you made a lot of money last year (over $150,000), you’ll need to have paid at least 110%. So you could owe tens of thousands of dollars at tax time but not get penalized so long as you make sure you covered last year’s tax bill. > **[Topic no. 306, Penalty for underpayment of estimated tax | Internal Revenue...](https://www.irs.gov/taxtopics/tc306)** > > The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. > **[Publication 505 (2024), Tax Withholding and Estimated Tax | Internal Revenue...](https://www.irs.gov/publications/p505)** > > Publication 505 - Introductory Material Introduction Nonresident aliens. ---
**Author:** ![edwardcoast](https://avatars.discourse-cdn.com/v4/letter/e/cab0a1/32.png) [@edwardcoast](https://boards.straightdope.com/u/edwardcoast)\ **Post date:** [March 20, 2017, 4:30am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/9 "2017-03-20T04:30:08Z")
> [@Jinx](#): > > I just received severance pay for which the Feds took like 40%. If I have a W-4 that tells an employer how much to take out of my regular paychecks, how does this affect things like severance pay which is taxed at a different rate? And, how do I know if the right amount was taken out to avoid penalties? Last, is there a special 1099 for severance pay? Best thing to do is consultant with a tax accountant to see what’s going on. But before you do that, contact the employer’s HR office and gather information asking them to explain your paycheck withholding saying “I believe there might be an error”. Severance pay can be done differently. Some people get a lump-sum, such as the equivalent of 3 months of pay. Others don’t do that, they continue to run payroll as normal with an end day over those same 3 months. They do this in case they find out your somehow violated your severance agreement. It could be just an error, where they treated your final paycheck without any regard to what you put on your W4. Or they put in the wrong numbers calculating it as if this lump-sum was what you normally get every pay period and that is how it got to 40%. There are some places online, free I believe which help you calculate what to do with your withholding for a W4. Maybe Quicken or Turbotax web sites do this? I know I’ve seen it someplace online. Put in all the numbers and see if you can determine what they did. ---
**Author:** ![edwardcoast](https://avatars.discourse-cdn.com/v4/letter/e/cab0a1/32.png) [@edwardcoast](https://boards.straightdope.com/u/edwardcoast)\ **Post date:** [March 20, 2017, 4:32am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/10 "2017-03-20T04:32:42Z")
> [@DSYoungEsq](#): > > As noted by **Shagnasty** , it’s irrelevant to the overall tax owed at the end of the year; it just increases the likelihood of getting a refund, and increases the amount of that refund. As pointed out, the money isn’t lost, but I’m sure the OP is far more concerned about getting as much net now since being separated from the company that had steady employment. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [March 20, 2017, 11:17am UTC](https://boards.straightdope.com/t/taxed-at-a-different-rate/782460/11 "2017-03-20T11:17:04Z")
> [@thelurkinghorror](#): > > Supplemental wages including severance, bonuses, commissions, etc. are withheld at 25%. Their tax is determined the next April 15, so you may get some of it back, depending. > [@watchwolf49](#): > > 40% tax doesn’t seem all that much if that includes all taxes … 25% Federal income tax plus 7.5% SS tax and another 7.5% State income tax … and like pointed out above … withholding taxes are just estimates, once you have your tax returns filled out, then everything is squared … Surely this is the answer. I’m pretty sure I experienced the same when I sold vacation time back to my employer.