The basic formula: weeks or months of pay based on tenure

Severance pay is most commonly calculated as a multiple of your regular weekly or monthly salary, multiplied by how long you worked there. The exact formula depends entirely on what your employer decides to offer — there is no federal law requiring severance at all, and no standard calculation that applies across industries or companies.

The most common approach is one week of pay per year of service. So if you earned $1,000 per week and worked there for five years, you would receive $5,000. Some employers use two weeks per year, some use a flat amount regardless of tenure, and some use a tiered system where longer-tenured employees receive more.

Your severance agreement or employee handbook should spell out the exact formula your employer uses. If you do not have that document, ask your HR department or the person handling your separation to put the calculation in writing before you sign anything.

Key Takeaways

  • Severance is calculated using a formula your employer sets — usually weeks or months of pay multiplied by years of service, but this varies widely by company.
  • Your base salary is what gets multiplied, not bonuses or commissions, unless your severance agreement explicitly includes them.
  • The calculation should account for unused vacation or paid time off according to your state's law, which varies by location.
  • You should receive the calculation in writing before signing a severance agreement, and you can ask HR to explain any part you do not understand.
  • Severance is taxable income and will be reported on a 1099 or W-2, so budget for taxes when you receive the payment.

What salary amount gets used in the calculation

Severance is almost always based on your base salary — the regular hourly wage or annual salary you earned, not including bonuses, commissions, stock options, or other variable pay. If you were paid $50,000 per year as your base salary and received a $10,000 annual bonus, the severance calculation uses the $50,000 figure.

Some severance agreements do include bonuses or commissions, but only if the agreement explicitly says so. If your job involved significant commission income and you want that included, you need to negotiate that into the severance package before you sign. Once you sign, you are bound by what the agreement states.

For hourly employees, the calculation typically uses your average hourly rate over the past three to six months, or your current hourly rate if that is higher. If your hours varied significantly, ask HR to show you which rate they are using.

How tenure is counted and what happens with partial years

Most employers count full years of employment from your hire date. If you were hired on March 15, 2019, and laid off on March 14, 2024, you have almost five full years. Whether that counts as four years or five years depends on your employer's policy — some round down, some round to the nearest year, and some count partial years as fractions.

Ask HR to confirm how they are counting your tenure before the severance is finalized. If you were hired mid-year and laid off mid-year, the difference between rounding down and rounding up can mean hundreds or thousands of dollars.

Time on leave — medical leave, parental leave, sabbatical — typically counts toward tenure unless your employment contract says otherwise. Unpaid leave sometimes does not count, so check your employee handbook or ask HR directly.

Unused vacation and paid time off in the severance calculation

Unused vacation and paid time off are usually handled separately from the severance formula itself. Instead, they are paid out according to your state's law. Some states require employers to pay out all unused PTO; others allow employers to forfeit it. A few states have middle-ground rules where employers must pay out vacation but not sick time.

Your severance agreement should list what you are receiving for unused time off. This might appear as a separate line item from severance, or it might be rolled into the total. Either way, it should be spelled out in writing.

If your state requires PTO payout and your severance agreement does not mention it, ask HR in writing whether unused time off will be paid separately. Document the answer so you have a record if the payment does not arrive.

Taxes and what you actually take home

Severance pay is taxable income. Your employer will withhold federal income tax, Social Security tax, and Medicare tax from the payment, just as they would from regular paychecks. The amount withheld depends on your tax bracket and how you filled out your W-4 form.

If your severance is large, you may end up in a higher tax bracket for that year, which means a larger percentage of the severance goes to taxes. Some employers offer to withhold a flat percentage (often 20 percent) instead of calculating based on your bracket, but that may not be enough if you are in a high tax bracket.

When you receive your severance, you will get a W-2 or 1099 showing the gross amount. Keep this for your tax return. If you think too much was withheld, you can claim a refund when you file taxes. If too little was withheld, you may owe money at tax time.

Negotiating severance if the offer seems low

If your employer offers severance, you can ask for more, especially if you have been there a long time or if the layoff was sudden. Employers sometimes have room to negotiate, particularly if they want you to sign a release agreement quickly or if you have institutional knowledge that is hard to replace.

Before you negotiate, know what your company typically offers. If you have colleagues who have left, ask them what they received (many people are willing to share this information). Compare your offer to what the formula should produce based on your tenure and salary.

Put any counteroffer in writing and be specific: "I am requesting eight weeks of pay per year of service instead of six" is clearer than "I think this should be higher." Give HR a deadline — usually three to five business days — to respond. If they decline, you can accept the original offer or ask for other forms of support, like extended health insurance coverage or outplacement services.

When severance is part of a release agreement

Many employers tie severance to a release agreement, which means you must sign away your right to sue the company in exchange for the severance payment. Before you sign, read the release carefully. It typically covers claims related to your employment, discrimination, wage disputes, and sometimes non-compete violations.

Some releases are broad and cover almost any claim you might have. Others are narrower. If the language is unclear, consider having an employment attorney review it — many offer free initial consultations. The cost of a brief review is often worth it if the severance is substantial.

You usually have a set period — often 21 days for individual terminations or 45 days for group layoffs — to review and sign the release. You also have a period after signing (often seven days) to revoke your signature. Do not feel rushed. Take the full time to review and decide.

Frequently Asked Questions

Does my employer have to offer severance?

No. Federal law does not require severance pay. Some states have narrow rules about specific situations, but most employers can lay off workers without any severance. If your company offers it, the terms are whatever your employer decides, unless you have a contract that guarantees a specific amount.

What if I was fired for cause instead of laid off?

Severance for termination for cause is less common and often smaller or nonexistent. However, some employers offer it anyway, particularly if the cause was performance-related rather than misconduct. Check your employee handbook or ask HR what the policy is for your situation.

Can severance be paid in installments instead of a lump sum?

Yes, if your severance agreement says so. Some employers pay severance over several months or as part of ongoing paychecks. The agreement should specify the payment schedule. If it does not, ask HR to clarify before you sign.

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

No. Severance is yours to keep regardless of when you find new work. Some severance agreements include a clawback clause that requires repayment under specific circumstances, but this is uncommon and would be stated explicitly in the agreement.

Is severance included in my final paycheck or paid separately?

It depends on your employer. Some include it in the final paycheck; others send it separately after you sign the release agreement. Your severance agreement should specify when and how you will receive the payment. If it does not, ask HR to put the payment schedule in writing.