Severance pay is a common form of compensation offered to employees when they’re laid off from a job. The term severance itself is typically associated with being cut off—or severed. While no one likes being surprised by unemployment, severance pay can at least do something to lessen the shock of such an abrupt change.
But the financial consequences of severance pay often aren’t as straightforward as they seem at first glance. Let’s take a look at all these financial consequences of severance pay so you can better navigate the waters of unemployment.
Financial Consequences of Severance Pay
For anyone who’s dealing with the loss of a job, the financial consequences of severance pay are seemingly obvious: You need to make this money last until you’re able to secure a new position. But this only tells part of the story. According to SHRM, there are three main ways you need to think about the financial consequences of severance pay specifically related to your unemployment benefits:
- State regulations that determine your unemployment benefits
- How you receive severance payments (all at once, or spread out over time)
- The way severance is defined and applied to your termination
Most people have no idea how to navigate these situations prior to being thrown into the middle of them. After all, being fired isn’t something people typically want to happen; so severance packages are often a surprise that’s followed by nervousness and confusion. Despite this, it’s essential you take the time to actually comprehend what’s happening with your severance package. Taking the time to learn your state’s regulations related to severance pay can make a huge difference in navigating through the process.
While many people will have other financial consequences of severance pay on their minds, taxes are still a critical consideration. A lot of people probably don’t even realize that severance pay is taxable. Though it might seem like a cruel form of punishment, it’s the truth. Severance pay is taxed in several ways: Social Security tax, Medicare tax, and Federal unemployment tax. This final one probably seems especially redundant considering the fact that receiving severance pay means you’re going to be unemployed. However, the rules are the rules, and it’s only going to hurt you more to avoid understanding how your severance pay will be affected by taxes.
How to Deal with the Financial Consequences of Severance Pay
Once you have an understanding of the potential financial consequences of severance pay, you need to figure out the best way to respond to the situation. Of course, people in difference scenarios are likely to have vastly different severance pay packages. These can even vary by a huge degree between individuals within the same company being laid off at the same time. So, how do you react to being offered a severance package?
One of the best things to do in order to minimize potential financial consequences of severance pay, and avoid negative outcomes with your particular severance package, is to take your time. It’s typical for companies to want to hurry people into signing their severance pay paperwork. It can be tough to be patient, especially if you really need the money, but you really want to read all the fine print and comprehend what you’re agreeing to before making anything final. Of course, you can’t wait forever to do this, but at a minimum, carefully read through everything and consider talking with a lawyer or another service provider who can help you through the process.
Furthermore, making decisions in the heat of the moment can lead to you making financial choices that you might regret later down the line. Losing your health benefits can be one of the most taxing aspects of being laid off from your job. Carefully evaluating the best line of action instead of just going with COBRA can potentially save you a lot of money. This might be critical if your finances are going to be tight after losing your job.
There’s nothing enjoyable about being laid off. While a severance package can lessen the blow, it’s not going to solve everything. Knowing the potential financial consequences of severance pay, however, can help you avoid truly falling behind.
