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I have been online trying to find out if I should modify my W4 to reduce the tax rate for a severance package and so far have not found much that was helpful..

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

I have been online trying to find out if I should modify my W4 to reduce the tax rate for a severance package and so far have not found much that was helpful.

Accountant's Assistant: Is there anything else important you think the Accountant should know?

Not that I know of

Submitted: 4 months ago.Category: Tax
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Answered in 35 minutes by:
1/19/2018
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 4 months ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,030
Experience: Former IRS Revenue Agent
Verified

Dear Customer,

Severance pay belongs to supplemental wages which is more than the regular wages. That is "in addition to" regular pay. Therefore, usually, the income tax bracket is withheld is at a higher and not lower than the regular withholding rate which is usually under filing status and exemption as shown on the regular W-4 form. The employee who receives supplemental pay usually does not have a choice. The employer follows the rule and regulation to withhold income tax.

IRS publication 15 and Rev. Rul. 2008-29, Supplemental wages; income tax published in the the Internal Revenue Bulletin: 2008-24. The Treas. Reg. § 31.3402(g)-1(a)(6) and (7), Supplemental Wage Payments are the best sources covering the subject. Below website link is the most complete and good discussion and source.

See https://www.irs.gov/irb/2008-24_IRB for further details.

If it is paid out as regular wages, periodically without any other additional base wage, the withholding rule should be the same as the regular withholding table.

If it is lump sum, if the amount exceeds $1M, it is taxed at the flat rate of the highest income tax bracket.

It it is lump sum, but below $1M, it is using the combination of "aggregate procedure and optional flat rate". That is we add up the wages with the supplemental pay to come up the total pay in the period, to come up with the proper withholding. Because of this rule, bonus pay or severance pay with the last wages usually will make the withholding to be higher than usually. It can be at a flat rate of 20% or 25% if not higher. Below quotation and the above website link are for your further information.

"If the supplemental wages paid to an employee by an employer (as defined in the regulations) during a calendar year do not exceed $1,000,000, then the amount of income tax withholding is determined under the rules provided in § 31.3402(g)-1(a)(6) and (7). These paragraphs describe two procedures for withholding on supplemental wages: the aggregate procedure and optional flat rate withholding."

"The amount of tax to be withheld is determined as if the aggregate of the supplemental wages and the regular wages constituted a single wage payment for the regular payroll period."

Please feel free to follow up.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP, IMTA

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