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Lump sum Severance vs Continuance Pay taxation

Looks for how other tax lump sum severance vs continuance pay. Lump sum are being taxed at the federal supplemental rate. Continuance pay is being taxed at the W4 rate. Your opinions on this would be appreciated. Should the Continuance pay be taxed at the supplemental rate?
Your professional guidance is much appreciated

Comments

  • By supplemental rate I assume you mean the optional flat rate of 22% of the gross. The employer may elect that method if the supplemental pay is recorded separately in the employer's records AND the employer has withheld income tax from the employee's regular pay (non-supplemental pay) at some time during the current calendar year or the immediately preceding calendar year. If those two conditions are not met. the employer may not elect to use the optional 22% flat rate. Also, if the mandatory flat rate applies, the optional flat rate may not be used.
    The "W-4 rate" you reference is probably the aggregate method for withholding from supplemental pay. This method aggregates all payments during a given pay period (regular pay, if any, and supplemental payments) and computes the withholding for the pay period on the total as if they constituted a single payment. If there is more than one payment, any amounts withheld from previous payments (during the pay period) are subtracted from the total required withholding for the pay period to compute the amount to withhold from the last payment.

    If the payment qualifies for using the optional flat rate (and the mandatory flat rate does not apply) the employer may elect to use either the aggregate method for the optional flat rate method for any supplemental payment, whether lump sum or periodic.

    In general, the optional flat rate will over withhold for low income tax payers and under withhold for high income tax payers, but may be just about right for taxpayers who are pretty much in the 22% tax bracket. The aggregate method frequently over withholds on a lump sum payment because it treats the amount of the lump sum as if that amount is paid each pay period of the year. For periodic severance pay, the aggregate method may be more accurate.

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