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The actual method would be to show the figures on your tax return and the amount over your true tax liability that was withheld will be refunded to you.
The full amount withheld will be reported on your W2 as well as the full amount you were paid in the tax year. As with any withholding, the amount withheld that is more than your tax liability is refunded.
Severance pay is seen as Supplemental Wages.
Supplemental wages are all wages that are not regular wages. Stated differently, supplemental wages are wages that vary from payroll period to payroll period based on factors other than the amount of time worked.
If supplemental wages are less than $1 million, the employer may generally choose to use either:
- the optional (25 percent) flat rate; or- the aggregate method.
When you file your tax return you will be refunded any and all amounts that are less than the actual tax you are required based on your taxable income at that time.
Please advise if you need more information or rating in a positive way is acceptable.
The employer has the option of the flat rate or adding to pay and applying the exemptions listed on the W4.
This is set out in Publication 15, which sets the rules for employer withholding.
A mutual agreement to separate is defined as severance which the IRS lumps under Supplemental income.
I know you would not wish to wait to file your 2015 return to receive a refund but the 25% on Supplemental wages is a practice allowed and followed by most companies.
The company has not performed any incorrect accounting by following the procedure unfortunately.