You should start by asking your HR department what they plan to do.
In general, the first year of disability payments is considered taxable wages, and is subject to social security tax and medicare tax as well as state and federal income tax. This income should be reported on a W-2. Subsequent income is usually not considered income from working (earned income) and is not subject to social security and medicare tax but is still subject to federal and state income tax. If you are at or over your full retirement age, your first year of wages is also not considered earned income and is not subject to social security and medicare tax.
However, severance pay is considered earned income and is fully subject to social security and medicare tax as well as federal and state income tax. You need to ask HR if this is considered disability pay or severance pay.
When you get a lump sum of taxable income in the middle of the year, you may need to make an estimated tax payment to avoid an underpayment penalty when you file your tax return. There are several ways to determine the estimated tax you need to pay. The simplest method is to pay up to your last year's tax liability. Your tax liability is the net you owed to the IRS, after all payments, withholdings and refunds are counted. For example, if you had $5000 of withholding and you got a $500 refund, your liability was $4500. Your tax liability was reported on line 24 of form 1040.
For 2022, you need to pay into the system, by withholding and estimates, an amount that is equal to or more than your 2021 tax liability. Look at your withholding up until you stopped working, and determine how much more you need to pay as an estimate to equal last year's liability. You can make your payment at www.irs.gov/payments. Choose 2022 estimated payment from the menus.
This will probably not be all the tax you owe, so make sure you set aside some extra money to cover the rest of the tax.
