The severance offer on the table usually isn't the final offer — most people just never ask what else is possible. HR presents it like a done deal, complete with a deadline that feels non-negotiable. In practice, a surprising number of terms are up for discussion, and knowing which ones is the difference between a bare-minimum package and a genuinely useful bridge to your next job.
What Is Severance Pay?
Severance pay is compensation provided by employers when involuntarily terminating an employee. It's typically paid in a lump sum or over a continuation period, and usually requires signing a separation agreement that includes a release of legal claims against the employer. Severance may also include continued health benefits, outplacement services, extended equity vesting, and reference agreements.
Typical Severance Formulas
The most common formula: 1-2 weeks of pay per year of service. A 7-year employee earning $90,000 ($1,731/week) receives 7-14 weeks = $12,115-$24,230. Senior executives typically negotiate 3-6 months minimum regardless of tenure. Some companies cap total severance at 26 weeks; others offer more for high earners or long-tenured employees.
| Years of Service | 1-Week Formula | 2-Week Formula |
|---|---|---|
| 2 years | $3,462 | $6,923 |
| 5 years | $8,654 | $17,308 |
| 10 years | $17,308 | $34,615 |
Based on $90,000 salary example.
Is Severance Pay Legally Required?
Federal law does not require severance pay. No federal statute mandates it. Severance is an employer's discretion — unless: (1) your employment contract explicitly promises it, (2) the employee handbook specifies a severance policy, (3) there was an implied promise through consistent past practice, or (4) the WARN Act requires 60 days' notice from employers with 100+ employees for mass layoffs affecting 50+ employees at a site, and the employer pays in lieu of notice. If you believe you were wrongfully terminated, consult an employment attorney before signing any release.
💡 Workers over 40 must be given at least 21 days to review a severance agreement and 7 days to revoke after signing (per the ADEA). Never sign under pressure — this timeline is your legal right.
How to Negotiate Your Severance
Negotiation is more successful than people assume: reasons to negotiate: strong performance record, long tenure, specialized knowledge needed during transition, potential legal claims (discrimination, retaliation), or leverage during a critical project period. What to ask for: additional weeks of pay, extended health insurance (COBRA subsidy), accelerated equity vesting, longer equipment return window, outplacement services, and a positive reference agreement. Ask for 48-72 hours to review any offer.
💡 A COBRA subsidy is worth more asking for than it used to be. The enhanced ACA marketplace subsidies expired at the end of 2025, so buying your own coverage on the exchange in 2026 is pricier than it's been in years — which makes a negotiated employer-paid COBRA stretch genuinely more valuable than it would have been a couple of years ago.
How Severance Is Taxed
Severance pay is taxed as ordinary income — subject to federal income tax, Social Security and Medicare taxes (FICA), and state income tax. Employers typically withhold at the flat supplemental wage rate: 22% federal for amounts up to $1 million in a year, jumping to 37% on anything above that. On a $25,000 severance package: expect approximately $8,000-$10,000 in combined federal, state, and FICA withholding. This withholding rate is often higher or lower than your actual marginal tax rate, so you may owe more — or get a refund of the difference — when you file. Plan accordingly if you'll rely on the severance for living expenses.
Quick Checklist
- Never sign a severance agreement without reading it completely — or having an attorney review it
- Exercise your right to 21 days of review if you're over 40 (don't waive this right)
- Negotiate beyond just the pay amount — health insurance continuation is often just as valuable
- Request outplacement services if not offered — they're often available for the asking
- Understand what claims you're releasing before signing — some may be more valuable than the severance
- File for unemployment right away — rules on how severance affects eligibility and timing vary by state, so don't assume based on someone else's experience
For informational purposes only. Not financial, tax, or legal advice. Consult a qualified professional before making major decisions.