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Category: Tax
Satisfied Customers: 12691
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I received a severance agreement from my former employer, which

Customer Question

I received a severance agreement from my former employer, which stated "the company shall (a)pay $31,200 (the "Settlement Amount), net of usual and customary W-2 employee withholding..."
They withheld a flat 25% Federal tax from that, paying out only $19,000. Should I have received the full "Settlement Amount"?
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.
Hi,Please don't shoot the messenget here, but this is called supplemental withholding..If you work as an employee, the amount of tax withheld from your paycheck is based upon the information you provided on Form W-4. However, if you receive any form of supplemental wages during the year, your employer may be required to withhold tax using a different method..There are two different supplemental withholding rates that can apply, depending upon the amount of supplemental wages you receive during a single year and depending upon whether the supplemental wages are paid as a separate payment or paid with your regular wages..If supplemental wages are $1 million or less, the withholding rate depends upon how your supplemental wages are paid.If your employer does not designate your pay as supplemental wages and includes it with your regular wages, the supplemental withholding rate does not apply and taxes are withheld using the information you provided on Form W-4.If your supplemental wages are identified separately from your salary (as a bonus, for example), your employer must withhold taxes using one of the following two methods:Withhold at the supplemental rate of 25 percent orCombine your regular wages for the pay period with your supplemental wages and treat the total as one payment of regular wages and then withhold taxes using ordinary withholding rates.As with your normal tax withholding, if the total of your taxes paid exceeds your taxes due for the year, you can receive a tax refund when you file your tax return.. Looks like they've used the simplified method and withheld the flat 25%.Let me know if you have questions ....Lane