What is severance pay?
Severance pay financially supports employees affected by layoffs, restructuring, or job eliminations.
While usually not legally required, it can include extended benefits, unused vacation payouts, and job placement assistance. Offering severance fosters goodwill protects your company’s reputation, and helps employees transition smoothly. Homebase payroll simplifies severance pay processing with accurate calculations and legal compliance.
When you should offer severance pay
Not every termination requires severance, but many employers choose to offer it in situations like:
- Company layoffs – If business is slow or restructuring is necessary, severance can help soften the impact.
- Job elimination – When positions become redundant due to automation or reorganization.
- Mutual separation agreements – If an employer and employee part ways on agreed terms.
- Employment contract requirements – If an agreement states severance will be provided.
- Company policy – Some businesses offer severance as part of their standard termination practices.
What’s included in a severance package
A severance package can be much more than just a final paycheck. Depending on company policies and employee tenure, it might include:
- Lump sum payment or continued salary – Often based on years of service.
- Payout of unused PTO or vacation days – If company policy allows.
- Extended health benefits – Some businesses offer continued insurance coverage or COBRA assistance.
- Outplacement services – Resume writing help, job placement assistance, or career counseling.
- Non-compete or confidentiality agreements – Some employers ask for agreements in exchange for severance.
How severance pay is calculated
Severance pay amounts vary, but here are a few common ways businesses calculate it:
- One to two weeks of pay per year of service
- A flat lump sum based on company policy
- Negotiated amounts in individual agreements
Before finalizing severance amounts, consider your budget, industry standards, and legal obligations.
Is severance pay taxable?
Yes, severance pay is taxable income, meaning it’s subject to the same tax withholdings as regular wages. Employers must:
- Withhold federal and state income taxes.
- Deduct Social Security and Medicare (FICA) taxes.
- Report severance payments on the employee’s W-2 form.
- Let employees know their severance payment could push them into a higher tax bracket.
Severance pay is made easy with Homebase payroll. Try it today! Homebase payroll accurately calculates withholdings and ensures compliance with all regulations.
What are the legal considerations for severance pay?
While federal law doesn’t require severance pay, some situations can create legal obligations:
- WARN Act compliance – Companies with 100+ employees must provide 60 days’ notice before mass layoffs or plant closings. If they don’t, severance pay may be required.
- Employment contracts – If a contract guarantees severance, you must pay it.
- Anti-discrimination laws – Severance agreements, such as the Age Discrimination in Employment Act (ADEA), must not violate labor laws.
To ensure compliance, it’s always a good idea to check with a legal expert before offering severance agreements.
Should your business offer severance pay?
Severance pay is a generous offer, but it’s not the right fit for every business. Here are some pros and cons to consider:
Pros:
- Shows employees they’re valued, even after departure.
- Helps former employees transition into new jobs more easily.
- Reduces the risk of legal disputes if employees sign a severance agreement.
- Enhances company reputation and strengthens employer branding.
Cons:
- Can be costly, especially for small businesses with limited cash flow.
- Employees may come to expect severance as standard, even when it’s not.
- Without clear guidelines, severance decisions may feel inconsistent or unfair.
How Homebase can help make severance pay easier
Managing severance pay, payroll compliance, and final paychecks can be overwhelming. Homebase payroll takes the stress out of the process by helping you:
- Calculate and process severance pay automatically
- Ensure tax withholdings are accurate and compliant
- Keep payroll records organized for reporting and audits
- Handle employee departures smoothly with seamless final pay processing
Sign up for Homebase today and simplify payroll—even when saying goodbye to employees.