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Calculating Illinois severance payments with taxes: What's withheld?

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If your employer offers severance pay after a company layoff (or individual layoff), be careful about spending that money before you receive it. It may still be subject to Social Security, Medicare, federal taxes and state taxes.

The Supreme Court will make the final decision on whether employees are subject to federal flat rate taxes of 25 percent, depending on which way they sway between United States v. Quality Stores, Inc. and CSX Corp. v. United States. With Quality Stores, the company was able to get their money back as a tax refund, but the opposite happened with CSX Corp.

According to Forbes, "...the IRS has suspended action on administrative refund claims totaling $127 million from approximately 800 taxpayers within the Sixth Circuit" even before the Supreme Court makes a final ruling between the two cases.

In the meantime, to calculate how much Chicagoans will receive in severance pay, Houston Chronicle provides an easy breakdown:

  • Social Security 6.2 percent
  • Medicare 1.45 percent
  • Federal taxes 25 percent flat rate, if severance payment is sent separately
  • Illinois state taxes approximately 5 percent provides an Illinois Salary Paycheck Calculator to calculate the full deduction amount.

As an example, say an employee was to receive $4,000 in severance. The following amounts would be deducted for the state of Illinois: $248 for Social Security; $58 for Medicare; $1,000 for federal taxes; $200 Illinois state taxes. So the employee would receive $2,494 after taxes.

How does this effect unemployment insurance?

When asked, "Are you receiving or will you receive wages in lieu of notice?" severance pay is not included, according to the Illinois Department of Employment Security (IDES) site. "Severance pay is not considered to be wages in lieu of notice and is not disqualifying for unemployment insurance purposes."

IDES also confirms that, "Since severance pay is for past services rendered, it is not disqualifying and the claimant is eligible for benefits..." immediately as long as the claimant meets other eligibility requirements even if a wage questionnaire is submitted.

Keep a record of your severance pay stub as well as IDES forms for tax purposes. The Supreme Court decision on refunds for severance payments is still pending and workers should still document all income on their tax forms, including unemployment insurance and both severance pay and severance pay deductions.

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