Severance Pay

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My severance payment from my previous employer will not withhold enough federal tax for 2025. Do I need to make estimated tax payments before April 2026?

Ask the Experts - W4 - May 2025

S

SusanR2Answer

Level 4

In short, yes.

Typically, when it comes to severance, the employer withholds a flat 22% supplemental wage rate. (Though this can be as high as 37% for amounts that exceed $1 million.) This withholding includes not just federal income tax but also Social Security and Medicare taxes (FICA).

If you've run your numbers and determined that you will owe more tax, yes, you should make estimated payments. Estimated payments are due quarterly on the 15th with the last payment for the year due January 15th of the following year. So for this year (2025) you've already missed the first quarterly payment. The second will be due June 15th, the third September 15th and the final in January 2026. Don't wait until April 2026 to pay your estimated taxes - you will open yourself up to interest and/or penalty. Remember, we are supposed to pay tax throughout the year as we earn income. (If you are not sure how much tax to pay, you may want to use one of our calculators to assist you. ( Tax Calculator ). Here is an article about how TurboTax calculates your estimated payment amounts: How Does TurboTax calculate my estimated payment amount?

If you make your payments online at irs.gov/payments, make sure you choose to have your payment applied to the correct year (2025). You'd be surprised how many people accidentally choose the wrong type of payment and the wrong year!

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S

SusanR2

Answer

Level 4

In short, yes.

Typically, when it comes to severance, the employer withholds a flat 22% supplemental wage rate. (Though this can be as high as 37% for amounts that exceed $1 million.) This withholding includes not just federal income tax but also Social Security and Medicare taxes (FICA).

If you've run your numbers and determined that you will owe more tax, yes, you should make estimated payments. Estimated payments are due quarterly on the 15th with the last payment for the year due January 15th of the following year. So for this year (2025) you've already missed the first quarterly payment. The second will be due June 15th, the third September 15th and the final in January 2026. Don't wait until April 2026 to pay your estimated taxes - you will open yourself up to interest and/or penalty. Remember, we are supposed to pay tax throughout the year as we earn income. (If you are not sure how much tax to pay, you may want to use one of our calculators to assist you. ( Tax Calculator ). Here is an article about how TurboTax calculates your estimated payment amounts: How Does TurboTax calculate my estimated payment amount?

If you make your payments online at irs.gov/payments, make sure you choose to have your payment applied to the correct year (2025). You'd be surprised how many people accidentally choose the wrong type of payment and the wrong year!

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M

micalizsAuthor

Level 2

I will owe more tax, but under safe harbor provision, I thought I would not have to make estimated payments because employer has already withheld >110% of my 2024 tax amount so far in 2025. Is that not correct assumption?

S

SusanR2

Level 4

To follow-up on your issue, we as taxpayers are supposed to pay tax as we go through the year receiving income. So, if you know you will not have enough tax withheld for your income level and tax status, you should make estimated payments or have your W-4 adjusted (as applicable) to avoid owing tax at the end of the year and being subject to an underpayment penalty and associated interest on that penalty.

That being said, with regard to your assumption about avoiding incurring the penalty for a given year, per the IRS for tax year 2024 (Underpayment of Estimated Tax By Individuals Penalty), here's the criteria you'd need to meet (you should review the highlighted page on this issue for more information):

Avoid a penalty

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

Your filed tax return shows you owe less than $1,000 or
You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

So to clarify, your initial question asked if you should make estimated payments and technically you should. This being said, you may qualify to avoid under payment penalties on the taxes you owe if you meet the above criteria.

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