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The short answer
In the US, severance pay is taxed as wages: IRS Publication 15 (2026) says it is subject to federal income tax withholding, social security and Medicare taxes and FUTA, and employers may withhold federal income tax on supplemental wages at 22% (37% on supplemental wages above $1 million in a year). Withholding is not your final tax, so check the agreement for the amount, timing, health cover, release terms and anything that affects your visa or unemployment claim before you sign.
A severance offer usually arrives with a deadline and a release form. For many Nigerians in the US it is the first time they have seen one, and it can land in the same week as visa worries. This guide explains how severance is taxed and what is worth checking or asking for before you sign. It is general information, not tax or legal advice.
How severance is taxed
IRS Publication 15 (2026) states plainly that severance payments are wages subject to social security and Medicare taxes, federal income tax withholding and FUTA tax. In practice that means four deductions from a severance cheque:
- Federal income tax withholding. Employers may treat severance as supplemental wages. Publication 15 says the supplemental withholding rate remains 22%, rising to 37% on supplemental wages above $1 million in the calendar year.
- Social security, 6.2% for employees on wages up to $184,500 in 2026, per IRS Topic 751.
- Medicare, 1.45%, plus an Additional Medicare Tax of 0.9% on wages above $200,000.
- State and local income tax, depending on where you live and work.
Withholding is a prepayment. Your real tax is worked out on your return, using your whole year's income. A lump sum on top of a normal salary can push some of your income into a higher bracket, or, if you are out of work for the rest of the year, your total income may be lower than usual and some of the withholding may come back as a refund.
Worked example
An example only, assuming the employer uses the 22% flat rate and the employee has not reached the social security wage base.
| Line | Amount |
|---|---|
| Gross severance | $20,000 |
| Federal withholding at 22% | $4,400 |
| Social security at 6.2% | $1,240 |
| Medicare at 1.45% | $290 |
| State tax (example 5%) | $1,000 |
| Net payment | $13,070 |
The four deductions total $6,930, leaving $13,070. Budget from the net figure, not the gross.
What to check in the agreement
- The amount and how it is worked out, for example weeks of pay per year of service, and whether it includes unused holiday.
- Timing. Lump sum or salary continuation. If you are on a visa, salary continuation can affect the date your employment is treated as ending, which matters for the H-1B grace period.
- Your official termination date, in writing.
- Health cover. Whether the employer will pay towards continuing your health plan, and for how long.
- The release. What claims you give up, how long you have to consider it and whether you can withdraw after signing. Read it all.
- Confidentiality and non-disparagement clauses, and whether they cut both ways.
- Restrictive covenants. Any non-compete or non-solicitation terms, which state law may limit.
- Equity and bonus. What happens to unvested stock, options and any bonus already earned.
- Reference and the reason for leaving, agreed in writing, since a new H-1B employer will ask.
- Immigration help. Whether the employer will keep a green card process going, pay for a lawyer or cover a return flight.
What newcomers can reasonably ask for
Employers are not obliged to negotiate, but many expect a reply. Requests that often get a hearing are modest and specific: an extra few weeks of pay, help with health cover costs, a later official termination date, an agreed reference, keeping a laptop, or a contribution to legal fees. Put requests in writing, be polite, and give a reason. If the offer involves a large release of claims, such as discrimination, an employment lawyer's review can be worth the fee.
Severance and unemployment benefits
States decide whether severance delays or reduces unemployment benefits. Ask your state agency before you file. Our guide to unemployment benefits on a work visa covers the status rules, and the H-1B grace period money plan shows how to budget the payment.
Sending part of it home
It is common to want to clear a family debt or fund a project in Nigeria with a lump sum. Hold back first for rent, health cover and taxes that withholding may not fully cover, then decide. Large transfers to family can raise US gift questions; see gift tax rules for large sums.
Where Pryme fits
If you move part of a payment to naira, Swap shows the rate and the fee first and you approve it, and money stays in dollars until you choose. Naira for a fixed goal at home can sit in a Savings Box.
Questions people ask
Is severance pay taxed in the US?
Yes. IRS Publication 15 (2026) says severance is wages subject to income tax withholding, social security, Medicare and FUTA tax.
What is the tax rate on severance?
Employers may withhold federal income tax at the 22% supplemental rate (37% above $1 million). Your actual tax depends on your total income for the year.
Can I negotiate my severance package?
You can ask. Specific, reasoned requests such as extra weeks of pay, help with health cover or a later end date are commonly considered. Employers are not obliged to agree.
Does severance affect H-1B status?
Severance itself does not extend status, but the official end date of employment matters for the grace period. Get the date in writing and ask a lawyer.
Sources
- IRS Publication 15 (2026), Employer's Tax Guide · accessed Oct 2026
- IRS Topic 751, Social Security and Medicare withholding rates · accessed Oct 2026
- US Department of Labor, Unemployment insurance · accessed Oct 2026
- 8 CFR 214.1 (Cornell LII) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.