Tax deductions on severance pay are calculated the same way as tax deductions on regular payroll. Therefore, to calculate deductions on severance pay, treat these sums as payroll amounts, and calculate withholdings as you otherwise would.
Calculate the Social Security deduction for severance pay by multiplying the amount of the severance payment by 0.062, unless this payment bumps your employee's annual earnings over $132,900, the maximum annual amount subject to Social Security withholding in 2019 (up from $128,400 in 2018). If your employee has already reached this threshold, don't withhold Social Security tax. If the severance pay amount takes your employee's annual earnings over threshold, withhold Social Security tax only on the portion below $132,900 for the year.
Calculate the Medicare deduction by multiplying the first $200,000 in severance pay by 0.0145 ($250,000 for joint returns or $125,000 for married taxpayers filing separate returns). Any deduction on pay over $200,000 can be calculated by multiplying the excess amount by 0.0235. Remember that you're liable for matching employer contributions on amounts withheld for Social Security and Medicare taxes.
Withhold state and federal income taxes from severance pay as you would from regular pay. For state income tax, withhold taxes at your state's regular rate. For federal income tax, you can use the percentage method, which calculates tax as a percentage of paycheck or severance amount based on estimated annual earnings, including severance pay.
Alternately, use the tax table method by finding the tax table page in IRS Circular E that corresponds to the information provided on the employee's W-4 form – such as single or married filing jointly – and the column on that page corresponding to the number of withholding allowances that your employee specified on the same W-4.
Divide the severance pay amount by the number of pay periods it is intended to cover. Find the line on the chart that corresponds to the earnings per pay period, and then multiply the income tax withholding per pay period by the number of pay periods.
The amount of income tax your employee will actually owe at the end of the year depends on variables in addition to the amounts you have withheld, such as employment opportunities later in the year and individual circumstances like number of jobs held and amount of mortgage interest paid. These amounts will be reconciled on the employee's annual tax form, and there will either be a balance due or the IRS will refund the amount of the withheld overpayment.
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Gartenstein, Devra. "How to Calculate a Severance Pay Deduction." Small Business - Chron.com, http://smallbusiness.chron.com/calculate-severance-pay-deduction-16706.html. 08 April 2019.
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