Magazine article HRMagazine

How Does a Lump-Sum Severance Payment Affect Unemployment Benefits Compared with Payments Spread out over a Few Pay Periods? What Are the Tax Implications?

Magazine article HRMagazine

How Does a Lump-Sum Severance Payment Affect Unemployment Benefits Compared with Payments Spread out over a Few Pay Periods? What Are the Tax Implications?

Article excerpt

The impact of severance payments on unemployment benefits depends on three factors: state regulations governing unemployment benefits, the manner in which the severance payments are made and how they are defined.

State unemployment regulations will generally determine how such payments will affect an employee's eligibility for unemployment. In some states, severance payments will have no impact, while in others they will delay or reduce the benefits that an employee will receive.

The type of severance payment received also influences unemployment benefits. Severance payments made to an employee in exchange for a release of claims or in recognition for past service may only delay the receipt of benefits or have no impact at all. On the other hand, payments that are made as salary continuation assigned to a specified period of time, or in lieu of notice, will likely delay or reduce the benefits that the employee will receive.

Another factor is whether the severance payment is unilaterally offered as part of company policy. Such payments may disqualify an employee from unemployment benefits, while severance that is negotiated on a case-by-case basis probably won't affect eligibility for unemployment.

From a tax perspective, the U.S. Internal Revenue Service views traditional severance payments as supplemental wages because they do not constitute a payment for services. …

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