Federal vs California withholding on severance
Updated
Independent editorial team. Every numeric claim cites a primary source — IRS / agency publication, federal or state statute, or controlling case law.
How federal supplemental withholding works
Federal supplemental wage withholding is governed by IRS Publication 15 (Circular E) § 7. The flat rate is 22% on supplemental wages paid to an employee during the calendar year, increasing to a mandatory 37% on any cumulative supplemental wages above $1 million. The 37% tier is the top marginal individual federal income tax rate; it is not optional and not adjustable on Form W-4. The 22% / 37% structure applies uniformly regardless of category — bonus, severance, commission, vacation payout, RSU vesting income, and back pay are all treated the same way at the federal layer.
The $1 million threshold is tracked by the employer paying the supplemental wages. IRS Pub 15 instructs the employer to apply 37% to any supplemental payment that, combined with prior supplemental wages from that employer to that employee in the same calendar year, exceeds $1 million cumulative. An employee with supplemental wages from two unrelated employers totaling more than $1 million for the year is not subject to 37% withholding at either employer if neither employer crosses the threshold individually — the gap is reconciled on the employee’s Form 1040 at filing time, typically with a substantial balance due.
The federal supplemental method is one of two options employers may use. The other is the aggregate method, which combines the supplemental payment with the most recent regular paycheck and applies the standard graduated tables to the combined amount. Most large employers default to the flat 22% method for separately identified supplemental payments because it is administratively simpler; the aggregate method tends to surface in smaller payroll systems where supplemental and regular wages are not separated on the paycheck.
How California supplemental withholding works
California publishes two flat supplemental rates in the EDD’s DE 231PS Information Sheet on Personal Income Tax Withholding — Supplemental Wage Payments. Bonuses and stock-option payments (including RSU vesting income that flows through payroll as ordinary income) are withheld at 10.23%. All other supplemental wages — severance, commissions, overtime pay, accrued vacation paid at separation, sick-leave payouts, retroactive wage increases, and back pay — are withheld at 6.6%. The split has been in place since November 1, 2009.
The categorical split is a structural difference between California and federal withholding. Federal supplemental withholding under IRS Pub 15 § 7 applies a single 22% rate to all supplemental categories; California carves out bonuses and stock for the higher 10.23% rate because the EDD calibrated the bonus tier to approximate California’s top marginal personal income tax bracket. The 6.6% rate, by contrast, was calibrated to be close to the California marginal rate for a moderate-to-upper-middle-income wage earner — recognizing that severance, commissions, and overtime are the typical supplemental wage forms for that population.
For a layoff paycheck that bundles severance with an accrued bonus, the employer must apply both rates separately on the state side: 6.6% on the severance component and 10.23% on the bonus component. The federal layer above does not split — both components are withheld at 22% federally. The result is a paycheck stub with two California supplemental lines but a single federal supplemental line, which is the most common source of "why are my withholding lines different?" questions from California layoff recipients.
FICA and CA SDI: the always-on layers
FICA and CA SDI apply to supplemental wages just as they apply to regular wages. They are not part of the supplemental withholding regime — they sit on top of it. On a California severance paycheck, three FICA/SDI lines appear regardless of how the income-tax layers are computed.
The federal OASDI (Old-Age, Survivors, and Disability Insurance) component of FICA is 6.2% on the employee side, capped at the annual Social Security wage base. The Social Security Administration set the 2026 wage base at $184,500. An employee whose year-to-date Social Security wages have already crossed $184,500 by the time their severance is paid will see no OASDI withholding on the severance. An employee well below the wage base for the year will see the full 6.2% applied to the severance, subject to the cap as cumulative wages cross $184,500.
The Medicare component of FICA is 1.45% on the employee side with no wage base — it applies to all wages without a cap. An additional 0.9% Medicare surtax (under 26 U.S.C. § 3101(b)(2)) applies once cumulative Medicare wages for the year cross $200,000 for a single filer or $250,000 for married filing jointly. Employers begin withholding the surtax once an individual employee’s year-to-date Medicare wages with that employer cross $200,000, regardless of filing status; spouses who individually stay under $200,000 but jointly exceed $250,000 reconcile the surtax on Form 1040.
California State Disability Insurance is the California-specific layer. SB 951, enacted in 2022 and effective January 1, 2024, eliminated the SDI taxable-wage cap. SDI now applies to all wages — including supplemental wages — with no upper limit. The SDI withholding rate is set annually by the EDD; for 2026 the rate is 1.3% on the employee side. A $50,000 severance paid to a California employee in 2026 will have $650 withheld for SDI alone.
The practical takeaway: even in the best-case scenario where the employee has crossed the OASDI wage base and is below the Medicare surtax threshold, the FICA + SDI layers still subtract 1.45% (Medicare) plus 1.3% (SDI) — a 2.75% floor — from the severance regardless of the income-tax layers above. For an employee under the OASDI wage base and below the surtax threshold, the FICA + SDI floor is 8.95% (6.2 + 1.45 + 1.3). These are the always-on subtractions; the supplemental income-tax layers add on top of them.
Putting the layers together: a worked example
Consider a California employee who receives a $40,000 severance plus a $15,000 retention bonus in a single final paycheck — a $55,000 total separation payment. Assume the employee’s year-to-date Social Security wages remain well under the 2026 $184,500 wage base and year-to-date Medicare wages are under $200,000 (no additional Medicare surtax). Assume cumulative supplemental wages from this employer remain under $1 million, so the federal 22% flat rate applies.
On the federal side, the employer applies 22% to the entire $55,000 because federal supplemental withholding does not distinguish severance from bonus. The result is $12,100 of federal income tax withholding. OASDI at 6.2% on $55,000 is $3,410, and Medicare at 1.45% on $55,000 is $797.50. The federal-side withholding subtotal is $16,307.50.
On the California side, the split between rates matters. The $40,000 severance is withheld at 6.6% — the "other supplemental" rate — producing $2,640. The $15,000 bonus is withheld at 10.23% — the "bonus and stock" rate — producing $1,534.50. CA SDI at 1.3% on the full $55,000 (no taxable-wage cap under SB 951) is $715. The California-side withholding subtotal is $4,889.50.
The total of $21,197 represents paycheck withholding only, not final tax. The employee will reconcile actual federal and California income tax on Form 1040 and Form 540 when the return is filed; depending on their full-year wages, deductions, and credits, the flat-rate withholding may produce a refund or a balance due. The worked-example table below details each component.
A useful reasoning shortcut: federal withholding on a California severance + bonus paycheck of size W is roughly 22% × W plus FICA, which is approximately 29.65% × W (22 + 6.2 + 1.45) as long as the OASDI wage base has not been crossed and no Medicare surtax applies. The California side is more sensitive to the bonus / non-bonus split — total California withholding ranges from 7.9% × W (1.3% SDI + 6.6% supplemental, all non-bonus) up to 11.53% × W (1.3% SDI + 10.23% supplemental, all bonus). The combined federal + California paycheck withholding rate for a typical California severance + bonus runs between roughly 37% and 41% of gross. Anything outside that range usually signals either a wage-base cap was crossed, the $1 million federal threshold was hit, or the additional Medicare surtax kicked in.
Residency change before payment
A common question for laid-off California employees: what happens if severance is paid after the recipient moves out of California? FTB Publication 1031 (Guidelines for Determining Resident Status) explains California’s general rule — California taxes wages earned for services performed in California regardless of the employee’s residency at the time the payment is received. Severance that is attributable to California-based service is California-source income even if the recipient has relocated to another state by the time the check is cut.
In practice this means an employee who worked in California for the qualifying employment period and receives severance after moving to, say, Texas or Nevada will still see California supplemental withholding (6.6% or 10.23% as applicable) and CA SDI on the severance paycheck. The mechanics may vary by employer — some payroll systems re-source income to the new state of residence; others retain California as the source state for severance allocated to past California service. Either way, California’s taxing jurisdiction over the California-source portion is established by service location, not residency at payment time. A dedicated state-tax-residency analysis is beyond the scope of this page; FTB Pub 1031 is the primary FTB authority.
Federal withholding does not change with state of residence. The 22% supplemental rate (or 37% above the $1 million cumulative threshold) applies regardless of where the recipient lives or where the employer is incorporated. The federal layer is uniform across states. The California layer is the one that may surface a residency-allocation question — and even that allocation is typically settled at filing time on Form 540NR (the California nonresident or part-year resident return) rather than at the paycheck withholding step.
Worked example
| Component | Federal withholding | California withholding |
|---|---|---|
| $40,000 severance | $8,800.00 (22% supplemental) | $2,640.00 (6.6% other supplemental) |
| $15,000 bonus | $3,300.00 (22% supplemental) | $1,534.50 (10.23% bonus/stock) |
| OASDI (6.2% employee, to 2026 SSA wage base $184,500) | $3,410.00 (6.2% × $55,000) | — |
| Medicare (1.45% employee, no cap) | $797.50 (1.45% × $55,000) | — |
| CA SDI (2026: 1.3% employee, no taxable-wage cap since SB 951) | — | $715.00 (1.3% × $55,000) |
| Subtotal withheld | $16,307.50 | $4,889.50 |
Numbers are illustrative withholding amounts only and do not represent final tax liability. Final tax is reconciled on Form 1040 (federal) and Form 540 (California). FICA OASDI applies up to the 2026 Social Security wage base of $184,500; Medicare applies to all wages, and an additional 0.9% Medicare surtax applies once cumulative Medicare wages cross $200,000 single / $250,000 MFJ. CA SDI applies to all wages with no taxable-wage cap as of SB 951 (effective January 1, 2024); the 2026 employee contribution rate is 1.3% per EDD. The example assumes cumulative supplemental wages for the year remain under the federal $1 million threshold; above that, the federal supplemental rate is a mandatory 37% per IRS Pub 15 § 7.
Calculate your California severance
Inputs default to California; adjust to your specifics.
Your situation
Informational only. Not legal, tax, or financial advice. The numbers below are benchmarks based on the inputs you provided; your actual outcome depends on your jurisdiction, plan terms, and individual circumstances. Always consult a licensed employment attorney before signing a separation agreement that waives statutory claims (ADEA, Title VII, WARN, state mini-WARN).
Severance benchmarks
Typical benchmark
$21,635
7.5 weeks · methodology: benchmarks are derived from publicly reported severance norms across us corporate layoffs. weeks/year scale with role level; tenure <1 year gets a floor; cap at 52 weeks. these are negotiation reference points, not promises.
| Band | Weeks | Gross |
|---|---|---|
| Typical | 7.5 | $21,635 |
| Good | 12.5 | $36,058 |
| Aggressive | 20.0 | $57,692 |
Tax breakdown (typical band)
| Gross | $21,635 |
| Federal supplemental | −$4,760 |
| State supplemental | −$1,428 |
| FICA — Social Security | −$1,341 |
| FICA — Medicare | −$314 |
| FICA — Additional Medicare | −$0 |
| Net cash | $13,792 |
Social Security withholding assumes a year-end layoff. If you're laid off earlier in the year and your salary exceeds the $184,500 Social Security wage base, your actual SS withholding will be higher and net cash lower than shown.
WARN Act
Not a group layoff
OWBPA review window
Individual exit (21-day review window) under the Older Workers Benefit Protection Act, plus 7-day revocation right.
Review window: 21 days · Revocation: 7 days after signing
COBRA cost
Monthly: $0
Annual: $0
Enter your employer-side monthly premium for an estimate.
Equity at termination
Forfeited unvested: $0
ISO exercise window post-termination: 90 days
- ISO holders: you typically have 90 days post-termination to exercise vested ISOs before they convert to NSOs.
Frequently asked
How does the IRS know to apply 37% if I have supplemental wages from two employers totaling over $1 million?
It does not — at withholding time. Each employer tracks the $1 million threshold independently for its own payments to you, so if neither employer individually crosses $1 million in cumulative supplemental wages to you for the year, neither will apply the 37% rate. The gap is reconciled when you file your Form 1040: your full-year supplemental income is taxed at your actual marginal rate, and any under-withholding produces a balance due (which may be substantial if you cross into the 37% federal bracket on combined wages).
Why is my California withholding so much lower than my federal withholding?
Two reasons stack. First, the flat-rate split: California withholds at 6.6% on severance and 10.23% on bonuses, while federal withholds at 22% on both. That gap alone is roughly 12-15 percentage points. Second, California’s top marginal income tax rate is lower than the federal top rate, so even at reconciliation the California layer should be smaller. The withholding ratio you see on the paycheck is approximately the right ratio for your final tax — though the absolute amounts may over- or under-withhold depending on your full-year income.
Does CA SDI really apply to my whole severance check now?
Yes. SB 951 (effective January 1, 2024) eliminated the SDI taxable-wage cap. SDI is now withheld at 1.3% (2026 rate per EDD) on every dollar of wages, including supplemental wages such as severance and bonus pay, with no upper limit. Before 2024, SDI stopped applying after the employee’s SDI taxable wages crossed an annual ceiling; that ceiling no longer exists.
I am in the 32% federal bracket — does that mean 22% under-withholds my severance?
In a high-earning year, yes — 22% supplemental withholding on severance is a deposit, not your final tax. If your full-year taxable income places you in the 32% federal bracket, the 22% flat supplemental rate will leave roughly a 10 percentage-point gap that you will owe when you file Form 1040. You can adjust your other-paycheck withholding through Form W-4 to make up the gap, or set aside the difference for the April filing deadline. If your severance arrives in a layoff year with no further W-2 income, your effective marginal rate for the year may be lower than 32% and the gap shrinks or reverses into a refund.
My severance and final paycheck regular wages are in the same check — which method does my employer use?
It depends on how the payroll system itemizes the payment. If the supplemental component is identified separately on the paycheck, the employer may apply the flat 22% federal and 6.6% / 10.23% California rates to that line item. If the supplemental and regular wages are paid as a single undifferentiated line, the employer must use the aggregate method — combining the amounts and applying the standard graduated tables to the total. Most large payroll systems itemize and use the flat-rate method; smaller payrolls often aggregate. Your paycheck stub will indicate which method was applied by showing either a flat-rate supplemental line or a single combined wage line with graduated withholding.
Does the additional 0.9% Medicare surtax apply to my severance?
Yes, once your cumulative year-to-date Medicare wages from a single employer cross $200,000, that employer must withhold the additional 0.9% Medicare surtax on every dollar above $200,000 — including severance. The surtax thresholds for final tax reconciliation on Form 1040 are $200,000 single, $250,000 married filing jointly, and $125,000 married filing separately (per 26 U.S.C. § 3101(b)(2)). Employer withholding does not adjust for filing status; the reconciliation at filing handles spouses whose individual wages stay under $200,000 but whose joint wages exceed $250,000.
Will my severance change my OASDI withholding if I have already crossed the Social Security wage base?
No. OASDI applies only up to the 2026 Social Security wage base of $184,500. Once your year-to-date Social Security wages for an employer cross that ceiling, no further OASDI withholding applies for the year at that employer — including on severance. Medicare (1.45% plus the 0.9% surtax above $200,000) continues to apply with no cap. If you started the year fresh at a new employer mid-year and have not crossed the wage base with that employer, the full 6.2% OASDI applies to your severance up to the cap.
Sources
- EDD DE 231PS — Personal Income Tax Withholding: Supplemental Wage Payments · EDD
- EDD — Contribution Rates and Withholding Schedules (2026) · EDD
- IRS Publication 15 (Circular E), § 7 — Supplemental Wages · IRS
- IRS Publication 15 (Circular E), § 6 — Social Security and Medicare Taxes · IRS
- 26 U.S.C. § 3402 — Income tax collected at source · Other
- SSA — Contribution and Benefit Base (2026 Social Security wage base) · Other
- FTB Pub 1031 (2024) — Guidelines for Determining Resident Status · FTB