Separation Pay Taxes

[Guest swaid]

I will be involuntarily separated from my employer in the very near future. They are providing all employees with a separation (monetary) package upon termination; however, they are taxing ALL employees at the 42% tax bracket. This happened to me about 4 years ago when I lost my previous job to downsizing.

Isn't this separation package a sort of "penalty payment" by the employer to stop (former) employees from suing them, etc. Is there any type of legal action in process to either stop this awful taxation and/or to assist people to recover the lost tax dollars??

[Guest Harry O]

First of all, your employer doesn't tax anybody on anything. Your employer simply withholds taxes from your payments in accordance with IRS requirements. This withholding may be more or less than your ultimate tax liability -- if it is more, you get a refund, if it is less, you owe Uncle Sam.

Second, it is possible to have 42% of your severance pay withheld for taxes. Federal income tax is usually withheld at the flat 28% rate, FICA is withheld at 7.65%, and state income taxes are also withheld (lets assume it is 7%). You add all these up and you get 42% +. If you think you won't end up owing all this tax when you eventually file your 1040, adjust your withholdings at your new job by using Form W-4.