If I get laid off and collect severance, will the severance be taxed if I claim exempt?

by William L. Stunkel, CPA | May 25, 2018
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I am about to be laid off from my job and will be collecting a severance payment. If I am claiming exempt, will my severance be taxed?

Claiming exempt on your Form W-4 or equivalent only directs employers to not withhold any federal income tax from your paycheck, or severance payments. Filling out your W-4 in this way does not change whether or not your wages and severance are actually taxable. When you file your income tax return, what you claim on your Form W-4 will not affect how much of your income is ultimately taxable—it simply affects how much is withheld during the year. By claiming exempt, you may end up owing taxes along with possible underpayment penalties for not having enough tax withheld during the year.

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Answered by: William L. Stunkel, CPA, is director of small business services with Holsinger PC in Wexford, Pa.

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