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

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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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