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What is the name of your state?pennsylvania
a retail company i work for is going out of business. we were finally told that will receive a severance package along with our vaction package. we were told that they will be combined in one check and heavily taxed. i asked the manager why will it be taxed so much and he said it is because it is considered a bonus, but i thought that vacations were earned and should no be combined to one check and be heavily taxed.
i was suppose to be intitled to six weeks severance then forty percent is to be deducted which brings my weeks to two point forty weeks. the company had previously laid off other employees due to store closings, but they received thier severance at one hundred percent.


I'm a Northern Girl
You haven't asked a question, but I assume you want to know if this is legal? Yes, it is.

Severance is not required by any law, so unless you have a
contract that guarantees the amount you will receive, the company is free to handle severance in any way they like. It is not at all uncommon for the first layoffs to receive more severance than the second or third wave of layoffs - that's simply a financial reality. As the company's financial situation deteriorates, they can afford less and less severance.

There is more than one legal way to handle the tax on severance. However, you can be sure that if the company withholds too much tax on your severance, you'll get it back in your tax return.


Senior Member
Vacation pay and severance pay are considered taxable wages by both the state and federal internal revenue services. Neither is taxed at a higher rate than are your normal wages.

The reason that these will be taxed at a higher rate when you receive them is because they are all going to be paid in one check. The way most payroll software works is that in order to calculate the proper amount of withholding, the software assumes that whatever wages you receive per pay period is what you receive every pay period for the balance of the year.

So let's say you normally earn $500 every week and are paid weekly. The "formula" set up in the payroll system assumes that your annual wages are $500 x 52 weeks and withholds taxes accordingly for that one week so you have the proper amount of taxes withheld. If your lump sum vacation and severance pay is $5,000 for one week, the payroll software makes the same assumption - that your annual income is $5,000 x 52 weeks and withholds a whopping amount of taxes.

That results in your being overwithheld. The good news is that when you file your year-end tax return, the overwithheld amount on both your state and federal income taxes will be returned to you.

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