Definition
Money an employer pays a worker whose job is being eliminated, most often calculated as a number of weeks of pay per year of service. No federal law requires it; it is usually offered in exchange for signing a release of legal claims, sometimes alongside continued health coverage or job-placement help. It is taxed as wages, typically as a lump sum with supplemental-wage withholding.
Why it matters
Severance is often the whole financial runway for a job search, so how it is taxed, whether it delays unemployment benefits in your state, and when health coverage ends all shape the plan. The release you sign is a contract, and the terms can sometimes be negotiated before signing.
Example
An employee with eight years of service is laid off from a $78,000 job with a package of two weeks of pay per year of service: 16 weeks, or $24,000, paid as a lump sum. After withholding and payroll taxes about $17,000 lands in her account. Against a $3,400 monthly budget that is five months of runway, before counting unemployment benefits or her emergency fund.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.