Is severance pay taxable? You’d think that the IRS would cut you slack if you lost your job. Sadly, it will not. There are no tax breaks for the unemployed. And 2018 changes to the tax code even added insult to injury by killing the deduction for job search expenses. So, which taxes will you encounter if you lose a job? The news is not great, but you can make Uncle Sam’s bite less vicious if you plan.
Severance Pay Taxes
You first need to figure out if there’re taxes on severance pay. If it’s considered wages, it is taxable and will be subject to Social Security and Medicare taxes. The amount of taxes you’ll owe on your severance pay will depend on how much money you receive.
If your severance pay is considered supplemental unemployment compensation benefits, it is also taxable. However, you won’t have to pay Social Security and Medicare taxes on this income.
Unemployment Compensation Taxes
Unemployment compensation benefits are taxable. You’ll owe federal income tax on these benefits and state income tax if your state taxes unemployment compensation. The amount of taxes you’ll owe on unemployment compensation will depend on how much money you receive.
Federal Income Taxes
This is a tax that you pay on your income. The federal income tax you’ll owe on your severance pay and unemployment compensation will depend on your tax bracket.
If you’re in the 10% tax bracket, you’ll owe 10% federal income taxes on your severance pay and unemployment compensation. If you’re in the 15% tax bracket, you’ll owe 15% in federal income taxes.
State Income Taxes
State income tax is a tax that you pay on your income. The state income tax you’ll owe on your severance pay and unemployment compensation will depend on the state in which you reside and your tax bracket.
For example, if you live in California and are in the 9.3% tax bracket, you’ll owe 9.3% in state income taxes on your severance pay and unemployment compensation.
Social Security and Medicare Taxes (FICA)
It’s a tax that you pay into the social security system. Medicare tax is a tax that you pay into the Medicare system. The amount of social security and Medicare taxes you’ll owe on your severance pay will depend on how much money you receive. You will not owe social security and Medicare taxes on your unemployment compensation.
How Do You Plan?
There are several things to help you make your path less bumpy regarding tax issues after a job loss. They include:
- Do Tax Liability Calculations
Estimating your tax liability for the year is essential when you lose your job. This will help you plan and ensure you have enough money to pay your taxes. You can use an online tax calculator or speak to a tax advisor to help you estimate your tax liability.
2. Find a Financial Advisor
A financial advisor can help you plan for the financial challenges you may face after losing your job, as they understand the tax laws. They can help you create a budget, estimate your taxes, and make investment decisions. Such experts can guide you on budget development.
Besides, when you receive your severance pay, they’ll guide you on how to set aside money for taxes. This will help you avoid being short when it comes time to pay your taxes.
3. File Your Taxes Early
If you’re expecting a refund, filing your taxes as early as possible is essential. This will help you get your refund sooner. The sooner you file your taxes, the sooner you’ll get your refund. And if you’re expecting a tax bill, the sooner you file your taxes, the sooner you’ll have to pay your bill.
Losing your job is never easy. But understanding the taxes you will encounter if you lose a job is crucial. Knowing what you owe on your severance pay and unemployment compensation can help you plan and make the transition a little easier. Understanding the tax liability can help you make informed decisions on what to do with your severance pay.
