Is severance taxable?

IRS Publication 525 says you must include in income the amounts you receive as severance pay, and any payment for the cancellation of your employment contract.

Severance payments are wages subject to social security and Medicare taxes. They are also subject to income tax withholding, so tax is taken out of them when they are paid.

Some employers offer outplacement services, such as training in résumé writing and interview techniques. If you choose to accept less severance pay so that you can receive these services, the IRS says you must include the unreduced amount of the severance pay in your income.

Generally, you must include in income all the unemployment compensation you receive. That includes state unemployment insurance benefits.

You should receive a Form 1099-G showing the total unemployment compensation paid to you in box 1. If it does not come in the mail, you may need to get it from your state's website.

You can choose to have federal income tax withheld from your unemployment compensation by giving Form W-4V to the office that pays you. Tax is then withheld at 10% of each payment. If you do not choose withholding, you may need to pay estimated tax.

CareerOneStop adds that you report unemployment benefits as income on your federal tax return and, in most states, on your state return.

Benefits paid from a fund your employer financed, which employees did not pay into, are not unemployment compensation. The IRS says they are taxable as wages and are subject to income tax withholding.

The federal WARN Act requires some employers to give notice before a plant closing or mass layoff. The Department of Labor says the Act helps ensure advance notice of qualified plant closings and mass layoffs.

NewsIntel reads the WARN lists that state labor agencies publish and links every notice to the list it came from. Look for your employer there.