Start with your employment contract and company policy

The first place to look is your written employment contract, offer letter, or employee handbook. Many employers spell out exactly how severance is calculated — often as a multiple of your weekly or annual salary, or as a set number of weeks per year of service. If your contract says "two weeks' pay per year of employment," the math is straightforward. If it says nothing, your company's severance policy document (usually in HR materials or on the employee portal) may have a formula.

If you cannot find a written policy, ask your HR department directly. They are required to explain how your severance was determined, and getting this in writing protects you. Some companies calculate severance differently based on job level, department, or reason for separation, so the formula that applied to a coworker may not apply to you.

Keep in mind that severance is not legally required in most states, so what you receive depends entirely on what your employer has committed to in writing or what they choose to offer. The absence of a policy does not mean you are owed nothing — it means you need to negotiate or accept what is offered.

Key Takeaways

  • Your employment contract or company handbook usually contains the severance formula — check these documents first before doing any math.
  • Severance is typically calculated as a multiple of your base salary or hourly rate, multiplied by years of service or weeks per year worked.
  • Unused paid time off (vacation, sick leave) is often calculated separately from severance and may be governed by state law rather than company policy.
  • Your gross severance amount is reduced by taxes, benefits continuation costs, and any repayment obligations before you receive the final check.
  • If your employer offers a severance agreement, review it carefully or have an employment attorney review it before signing, because signing usually waives your right to sue.

Calculate your base severance from salary or hourly rate

Start with your gross annual salary or your hourly rate. This is the amount before taxes and benefits. If you are salaried, divide your annual salary by 52 to get your weekly pay, then multiply by the number of weeks your severance covers. If you are hourly, multiply your hourly rate by the number of hours in your severance period (usually 40 hours per week).

For example: if you earn $52,000 per year and your company offers two weeks of severance, your base severance is $2,000 (52,000 ÷ 52 weeks × 2 weeks). If you earn $25 per hour and receive four weeks of severance, your base is $4,000 (25 × 40 hours × 4 weeks).

Some companies calculate severance as a lump sum based on years of service — for instance, one month's pay for every year you worked there. In that case, multiply your monthly gross pay by the number of years employed. A $60,000 annual salary is $5,000 per month, so 10 years of service would yield $50,000 in base severance.

Account for unused paid time off separately

Vacation days, sick leave, and personal days are often treated differently from severance. In many states, unused vacation must be paid out regardless of whether the company offers severance. Some states require this by law; others leave it to company policy. Sick leave is less commonly paid out, and the rules vary widely by state and employer.

Check your employee handbook or ask HR which types of paid time off are paid out upon separation. Calculate this amount separately from severance: multiply your daily or hourly rate by the number of unused days. If you have 15 unused vacation days and earn $200 per day, that is $3,000 in paid time off — which may be added to your severance check or paid separately.

Some employers bundle paid time off into the severance calculation, while others pay it out as a distinct line item. Either way, you should receive payment for it. If your final paycheck or severance agreement does not account for unused time off, ask HR why and request that it be added.

Understand what gets deducted before you receive the check

Your gross severance amount is reduced by federal and state income taxes, Social Security tax, Medicare tax, and any local taxes your state or city imposes. The exact amount depends on your tax bracket and state of residence. Your employer will withhold these taxes just as they do from your regular paycheck, so your net severance (what you actually receive) will be significantly less than the gross amount.

If your severance agreement includes benefits continuation — such as health insurance coverage for a set period — the cost of that coverage may be deducted from your severance or billed to you separately. COBRA continuation coverage, which allows you to keep your employer's health plan for up to 18 months, is not free; you pay the full premium plus a 2% administrative fee. Some employers subsidize this cost as part of severance; others do not.

You may also owe repayment of signing bonuses, relocation costs, tuition reimbursement, or other benefits if your employment contract includes a clawback clause. These are deducted from severance before you receive it. Review your original offer letter to see whether any of these apply to you.

Check whether severance is affected by your reason for separation

Some companies pay full severance only if you are laid off or your position is eliminated. If you are fired for cause (theft, violence, gross misconduct), you may receive no severance at all. If you resign voluntarily, you may receive a reduced amount or nothing. If you are terminated without cause, you typically receive the full severance outlined in policy.

The distinction matters because it affects both the amount and the conditions attached to it. A severance agreement tied to a layoff often includes a release clause — you sign away your right to sue the company in exchange for the severance payment. A termination for cause may not include severance at all, or may include it only if you sign a non-disparagement agreement.

Ask HR to confirm in writing which category your separation falls into and how it affects your severance calculation. If the reason is unclear or disputed, this is worth clarifying before you sign anything.

Review the severance agreement before signing

If your employer provides a formal severance agreement, read it carefully. It will state the gross amount, the payment schedule (lump sum or installments), what benefits continue and for how long, and what you are agreeing to in exchange. Most severance agreements include a release clause that requires you to waive your right to sue the company for wrongful termination, discrimination, or other claims.

Once you sign a severance agreement, you generally cannot undo it or negotiate further. If the amount seems low, the terms are unclear, or you believe you have a legal claim against the company, consider having an employment attorney review it before you sign. Many attorneys offer a brief consultation at no cost and can tell you whether the agreement is fair or whether you should negotiate.

Some companies allow negotiation of severance terms, especially if you have been with the company a long time or hold a senior position. You can ask for a higher amount, extended benefits, or removal of certain clauses. The worst they can say is no, and you can then decide whether to accept the original offer.

Frequently Asked Questions

Is severance pay taxed?

Yes. Severance is treated as income and is subject to federal income tax, state income tax (in most states), Social Security tax, and Medicare tax. Your employer withholds these taxes from the severance check before you receive it, just as they do with regular wages. The amount withheld depends on your tax bracket and state of residence.

Do I have to pay back my severance if I find a new job quickly?

No. Once severance is paid, it is yours to keep regardless of when you find new employment. However, if your severance agreement includes a clawback clause for specific benefits (such as a signing bonus or relocation reimbursement), you may owe repayment of those items if you leave within a certain time period. Check your original offer letter and severance agreement for any such clauses.

What if my employer made a mistake in calculating my severance?

Contact HR immediately and ask them to recalculate it. Bring your employment contract, offer letter, and the severance agreement to show the formula that should have been used. If they made an error in your favor, they may ask you to return the overpayment, but you should still report it so the record is correct. If they made an error against you, they are obligated to pay the difference.

Can I negotiate severance after my employer offers it?

Yes, especially if you have been with the company a long time, hold a senior position, or believe the offer is below what your contract promises. You can ask for a higher amount, extended health insurance coverage, outplacement services, or removal of restrictive clauses. Put your request in writing and give HR a deadline to respond. Be prepared to accept their counteroffer or walk away.

What happens to my health insurance after severance ends?

If your severance includes continued health insurance, that coverage ends on the date specified in your severance agreement. After that, you can enroll in COBRA (if your employer had 20 or more employees) to continue your plan for up to 18 months, though you pay the full premium. You can also shop for coverage on your state's health insurance marketplace or through a new employer's plan if you find work before severance benefits end.