The Truth About Severence Packages, PTO Payouts, and the Final Paycheck

Updated on April 25, 2016
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Something to Look Forward To?

If one positive thing can come out of being laid off, it's your severance package, right? What could be better in the face of an impending crisis like receiving a lump-sum payment that reflects your years of service with the company and gives you a sense of intrinsic value? In short: Everything. there's a lot of things about severance packages that aren't discussed up front - and those little caveats can make a world of difference when it comes to how much you can expect, the taxes that will be deducted from it - and the way a lot of employers manipulate the system to "stick it to you" one last time, before closing the door on you for good.


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Severance Packages:

A lot of larger companies may offer a severance package to displaced workers, especially if they've been employed for several years. While a great idea in theory, in practice it leaves a lot to be desired. The first thing you need to realize is that not all severance packages are created equally. Unfortunately, a lot of companies have found a loophole in terms of treating all employees equally - and many of them do not keep copies of their typical severance policy procedure in writing where it is easily accessible to potentially laid-off workers. Since there is nothing in writing to fall back on, employers are almost able to discriminate "at will" in what they offer laid-off workers.

For example, I was recently laid off from a job that I held for over 8 years. Although the news was less-than pleasant, I was confident in the face of adversity, because the company's unspoken policy regarding severances was somewhat generous - at least, so I thought. The company had done several waves of lay-offs in the years I was employed there, and the typical layoff included a severance package that amounted to two weeks of full pay per year of service. Since I had been employed without pause for 8 years, I thought I was looking at around 4 months of pay upfront. I wasn't thrilled about losing my job, but at least I had some time to find a replacement before I seriously had to begin worrying about finances. Boy, was I wrong. Although they had offered this package to all of the laid-off workers prior to my group, my group was so large (almost 100 people at once) they didn't offer the normal severance. In fact, all they were offering (take it or leave it) was 2 weeks of pay, and an additional 2 weeks pay as a "bonus" if we stayed on until the end. Although I went through a few hoops with the local equal opportunity employment council in my state, since nothing was concrete in writing, I ultimately didn't have a leg to stand on - and in order to get my severance and bonus package at all, I had to sign an agreement that was six pages of legal jargon which included clauses about an agreement to not bring forth any legal proceedings against the company - even after my job was terminated. Desperate, I signed the paperwork, and dutifully received my final paycheck two weeks after my end date. Fortunately, I had already found another job, because my final paycheck threw me for another loop that I hadn't been expecting - a loop in the form of taxes.


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Taxing Additional Income:

My former company was "nice" enough to give all of us unfortunates a packet of information when we were delivered the news that our services were no longer necessary. One of the sheets of paper explained in no uncertain terms that our severance package was considered "additional" income in the eyes of the IRS, and that it would be taxed at 25%, regardless of what our normal tax bracket was. As much as that stunk, I expected as much. What I didn't expect was that a lot of things would up the ante as well - and that the IRS would be walking away with a much larger chunk of my final paycheck than I bargained for - and it wasn't just the severance money that was taxed at that high rate.

Final Paycheck Calculations:

My final paycheck came as one lump sum and included everything, instead of breaking it up into different payments. That everything consisted of:
- Final Two weeks of pay for my last two weeks of work
- Severance pay (additional two weeks of pay)
- Bonus Payment for Staying through my End-Date (additional two weeks of pay)
- PTO payout (which amounted to an additional two weeks of accrued time)

When all of those amounts were added together, it amounted to being taxed at an almost 30% tax rate. When I called to inquire, I was told that everything except for my two weeks of pay for actual work was taxed at 25%, and the amount of the payment bumped me up to a higher tax-bracket which explained the additional bump in taxes.

These kinds of lump payments are all-too-common, and they give the company (and the government) every advantage, while kicking an already down-on-their-luck former employee in the teeth.


Additional Programs

Due to the current state of the economy in the United States, the Federal government has implemented some policies that could give you a leg up in education and future employment. The TAA program can pay for all of your schooling in a high-demand field. If you've always put off getting your degree, now is the time to do it - and on the government's dime. If your company has not applied on behalf of their terminated employees, you can inquire about the program at your local unemployment office.

Don't count on unemployment to pay all of your bills, either. Depending on the state, you may be receiving less than 30% of your gross pay - and it's possible that you can only receive the maximum benefit amount for less than six months. It's imperative to have a backup plan in place before you find yourself in a potentially sticky situation.

Above all else, however, don't lose hope. Spiraling into depression after a job loss is all-too-common, but ultimately, it won't lead you anywhere positive. Despite the difficulties you face, you can move forward and land yourself an even better job down the road. Over time you may look back on this moment and recognize that it's the best thing that could have happened to you. Although it's hard to find a bright side to this negativity, in time you may be able to see one, whereas now it's only darkness.

Conclusion: Don't Lose Hope

A severance package and/or bonus payment is a nice way to say goodbye, and not all companies offer them. If you're looking to sock away a substantial nest-egg, however, make sure that you consider how much of that payment will automatically be deducted because of taxes and the resulting increase in your overall tax rate - BEFORE committing that money to other uses. While you may get a portion of those taxes back at the end of the year, that does little good in the moment, when that money could come in handy. If you have any questions, ask - before you open your final paycheck or check your bank accounts online after your direct deposit. Don't expect your former HR department to do you any favors, either. They're out to cover their own rears, and since you're no longer employed at the company, you shouldn't expect to be treated as one of the gang anymore. After your end-date has passed, it's impossible to go back and change your w-4 in order to get more of your money upfront, and it's worth it to lower your withholding amount before you walk out the door for the last time.


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