How severance actually works in the US
US private-sector employers are not required to pay severance in almost all cases. There's no federal law mandating severance pay. The WARN Act requires 60 days' notice for mass layoffs, but notice is different from severance. Most severance comes from: (a) company policy, (b) individual employment contracts, (c) union contracts, (d) negotiations at the time of separation.
Typical US severance formulas when offered:
- Rank-and-file: 1-2 weeks of base salary per year of service, often capped at 26 weeks
- Middle management: 2-4 weeks per year, capped at 26-52 weeks
- Senior executives: 6-12 months minimum, often 18-24 months for C-suite
The calculator uses a common "weeks per year of service" formula. Your actual offer may differ — always compare against what your employment agreement specifies.
What else is typically in a severance package
Beyond base severance pay, a full package often includes:
COBRA premium subsidy. Employer continues paying health insurance premium for 3-12 months post-termination. Can be worth $8,000-20,000 depending on plan and family size.
Extended equity vesting. For stock-heavy comp, you may negotiate continued vesting through the severance period or acceleration of a specific tranche.
Pro-rata bonus. If separated mid-year and a bonus is owed, pro-rata payout for the time worked before separation. Not automatic; often negotiated.
Outplacement services. Career coaching, resume help, recruiter introductions. Typically a 3-6 month engagement worth $2,000-5,000.
Reference and non-disparagement clauses. Employer agrees to provide a neutral reference and not disparage you. Usually mutual.
Release waiver. In exchange for severance, you waive the right to sue for most employment claims. This is where legal review matters most.
The release — what you give up
Accepting severance almost always requires signing a "release" or "separation agreement" in which you waive specific rights: (a) right to sue for discrimination (Title VII, Age Discrimination Employment Act, ADA), (b) right to pursue unpaid wages or back pay, (c) right to make public disparaging statements, (d) in some cases, right to work for competitors for a period.
For workers over 40, the Age Discrimination in Employment Act (OWBPA) requires specific disclosures: 21 days to consider the agreement, 7 days to revoke after signing, clear language stating you're waiving ADEA rights. If these aren't followed, the release may be invalid.
Before signing any release worth more than a few weeks of pay, have an employment attorney review it. The typical cost is $300-800 for a quick review — well under 1% of the severance value in most cases.
The severance tax
Severance is taxable as ordinary income. The employer typically withholds at the flat 22% federal supplemental rate, plus FICA (7.65%), plus applicable state tax.
Example. $50,000 severance. Withholding: 22% federal ($11,000) + 7.65% FICA ($3,825) + typical 5% state ($2,500) = $17,325. Net check: $32,675.
At year-end, if your final total income is in a higher bracket, you may owe more federal tax. Plan to set aside 10-15% of net severance for tax reconciliation.
Severance-as-lump-sum vs severance-as-salary continuation: lump sum is paid all at once; salary continuation pays you through the severance period as if you were still employed. Tax treatment is the same either way. Salary continuation can affect health insurance continuation and may be better for gap coverage.
Negotiating severance
When first offered severance, almost never sign immediately. Common negotiation levers:
Duration. If offered 8 weeks, negotiate for 12-16. If offered 3 months, negotiate for 6. Employers often have discretion to increase within a policy range.
COBRA coverage. Ask for extended coverage — 6 months instead of 3, or full 18-month COBRA premium subsidy.
Equity treatment. For RSU-heavy comp, ask for accelerated vesting of the next tranche. For options, ask for extended post-termination exercise window (from 90 days to 12 months or more).
Non-compete release. If your employment has a non-compete, negotiate a release so you can take the next job freely.
References. Get a specific written positive reference and a designated reference contact in writing.
The expected outcome: most employers will accept 20-40% more duration than the initial offer if you push professionally.
Special cases: executive severance and change-of-control
Executive severance is a different beast. C-suite and VP-level roles typically have "change of control" or "without cause" clauses in employment contracts. Common terms:
- Severance period: 12-24 months of base + target bonus
- Equity acceleration: Single-trigger (immediate vest on change of control) or double-trigger (vest if separated within 12-18 months of change of control)
- Benefits continuation: Full COBRA for severance period, sometimes with premium reimbursement
- Gross-up: Sometimes includes tax gross-up for excise tax on "golden parachute" payments (IRC Section 280G)
Executives: have your employment contract reviewed annually and at every change in your company's situation (new CEO, acquisition rumors, activist investor). This is when you'd want the severance terms to trigger favorably.
Disclaimer
This is not legal or financial advice. Severance terms, release waivers, and post-termination employment rights are governed by federal, state, and contract law. The OWBPA rules for workers 40+ are strict and specific. For any severance agreement worth more than a few weeks of pay, consult an employment attorney before signing. Tax treatment of severance varies by state; for large severance payments, also consult a CPA on timing and estimated payments.