Severance Pay Calculator
*This is a pre-tax estimate. Weekly rate calculated as Monthly Salary / 4.345.
How is Severance Pay Calculated?
Severance pay is a compensation package offered to employees when their employment is terminated through no fault of their own, such as during layoffs or corporate restructuring. While not always required by law, many companies provide it to assist employees during their career transition.
The Common Severance Formula
Most organizations use a standardized formula based on the length of tenure. The basic logic follows this structure:
(Weekly Salary) × (Weeks of Pay per Year) × (Years of Service) = Base Severance
- Weekly Salary: This is typically your gross base pay before taxes. To find this, divide your annual salary by 52 or your monthly salary by 4.345.
- The Multiplier: In many industries, the standard is 1 to 2 weeks of pay for every year worked. Senior executives may negotiate significantly higher multipliers.
- Years of Service: Usually rounded to the nearest half or full year.
Real-World Calculation Example
Sarah has worked as a Marketing Manager for 6 years. Her monthly salary is $6,000. Her company policy offers 2 weeks of pay per year of service.
1. Weekly Pay: $6,000 / 4.345 = $1,380.89
2. Multiplier: 2 weeks per year
3. Calculation: $1,380.89 × 2 weeks × 6 years = $16,570.68
Factors That Influence Your Final Package
Beyond the basic formula, several other components can increase the final amount displayed on your severance agreement:
1. Accrued Vacation Time
In many jurisdictions, employers are legally required to pay out any earned but unused vacation days (PTO). This is added on top of the calculated severance weeks.
2. Notice Periods (WARN Act)
In the United States, the Worker Adjustment and Retraining Notification (WARN) Act requires large employers to provide 60 days' notice for mass layoffs. If they fail to provide this notice, they may owe pay in lieu of that notice period.
3. Bonuses and Commissions
If you were terminated near the end of a quarter or fiscal year, you may be entitled to a pro-rated portion of your annual bonus or earned commissions.
4. Health Insurance (COBRA)
Many packages include the employer paying for a specific number of months of COBRA premiums so that your health insurance coverage remains uninterrupted.
Is Severance Pay Taxable?
Yes. It is important to remember that the IRS treats severance pay as supplemental wages. This means it is subject to federal income tax, Social Security, and Medicare taxes. Depending on the amount, it might be taxed at a higher withholding rate than your regular paycheck, though you may get some of this back as a refund when you file your annual taxes if you were over-withheld.