Severance package tax shock - almost 50% taken out in taxes after layoff

This is actually pretty common with severance payments. The issue is that payroll systems often treat lump sum payments as if you'd be making that amount every pay period for the whole year, which pushes the withholding into much higher tax brackets temporarily. The good news is that when you file your taxes next year, your actual tax liability will be based on your total income for the year, not these individual payments. So if your overall income for the year doesn't put you in those higher brackets, you'll likely get a significant refund. You could also submit a new W-4 to your former employer specifically for the severance payment to reduce withholding, but that's probably too late now. If you're really concerned about the cash flow in the meantime, you might want to adjust your withholding at a new job (when you get one) to compensate, or if you're eligible, you could file for an early tax refund using Form 4466.

After getting hit with almost the same situation last year (48% taken from my severance!), I found this AI tool that analyzes your tax documents and explains exactly what's happening. It helped me understand why my withholding was so high and predicted how much I'd get back when filing. I used https://taxr.ai and uploaded my last paystub plus the severance statement, and it broke everything down clearly. It even highlighted that my employer had miscategorized some of the severance which was causing extra FICA withholding.

Just wanted to follow up - I tried that taxr.ai service that was mentioned and it was legitimately helpful. I uploaded my severance agreement and last three pay stubs, and it showed exactly why my withholding was so high. In my case, my employer had coded the payment as "supplemental wages" at the 22% flat rate PLUS regular income tax withholding, which was way too much. I was able to contact HR with the specific tax codes that were incorrect, and they're actually processing an adjustment that will get me about $3,200 back now instead of waiting until tax time. The visualization of where every dollar went was super clear too.

If you need to talk to the IRS about this withholding issue (which might be a good idea), good luck getting through to them on the phone. After my layoff last year, I spent literally 9 hours on hold over 3 days before giving up. Then I found this service called Claimyr (https://claimyr.com) that somehow gets you through to an IRS agent, usually within an hour. There's a demo of how it works at https://youtu.be/_kiP6q8DX5c that convinced me to try it. The IRS agent I spoke with confirmed that my employer had over-withheld and explained my options for getting it corrected sooner rather than waiting for my tax return.

I need to eat my words from my previous comment. After waiting on hold with the IRS for 3+ hours yesterday and getting disconnected AGAIN, I tried that Claimyr service out of pure frustration. I'm still shocked, but I got connected to an actual IRS representative in 37 minutes. The agent confirmed that supplemental wages like severance are often over-withheld and explained that I could either wait for my tax refund or potentially file a Form 843 to claim a refund of excessive withholding before filing season. Apparently my employer withheld at the maximum rate when they didn't need to. This info alone will save me thousands in cash flow over the next few months.

This happens ALL THE TIME with severance packages. When I got laid off in 2023, my $55k severance had about $23k withheld. Companies do this because: 1. Payroll systems automatically categorize lump sums as supplemental wages, which get withheld at a flat 22% federal rate 2. Then they ALSO calculate withholding as if you make that amount every pay period 3. Plus state taxes and FICA on top of that But don't worry - you WILL get most of that back when you file your taxes! I ended up getting almost $14k refunded. The system is stupid but that's how it works.

Has anyone successfully gotten their employer to reduce the withholding BEFORE paying the severance? I'm about to get laid off (they told us it's coming) and want to avoid this exact situation.

The withholding on your severance is unfortunately very typical. I went through this exact same shock when I was laid off 6 months ago - $42k severance with over $18k withheld. What's happening is your payroll system is treating that lump sum as if it's your new regular pay rate, so it's withholding taxes as if you suddenly make $444k annually instead of your actual salary. Here's what I learned: most of that overwithholding WILL come back to you as a refund when you file taxes, assuming your total annual income doesn't actually put you in those higher brackets. In my case, I got back about $11,500 of the $18k they took. One immediate thing you can try - contact your former employer's payroll department and ask if they can process an amended W-4 for any remaining severance payments. Some companies will do this if you haven't received the full amount yet. Also keep very detailed records of everything because you'll need to track this carefully for your tax filing. The cash flow hit is brutal when you're already dealing with job loss stress, but the IRS math will work itself out in your favor come tax time.