How Does Taking a Severance Package Affect Your Unemployment Options?

Unemployed beautiful young woman looking for a job online from home using a laptop and her smart phone, trying to decide what to do.
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If you receive severance pay from a former employer, you may actually end up in a pretty good place financially. Many severance packages pay 50% to 100% of wages for a specified time period, and if you’re collecting unemployment benefits as well, you may even earn more after you’ve been laid off than you did while you were working.

Unfortunately, this type of “double-dipping” is not always allowed. In fact, in some cases, your severance package may legally prevent you from drawing unemployment benefits as well. Here’s a quick look at the factors that are involved when it comes to severance packages and unemployment options.

State of Residence

States are responsible for unemployment payments, not the federal government. This means that individual states determine whether or not severance pay disqualifies candidates from receiving unemployment benefits.

In some states, severance pay is treated in the same manner as regular wage income, which in most cases disqualifies recipients from unemployment benefits. However, other states like California don’t consider severance pay to be income for unemployment purposes, in which case you can usually qualify for benefits. You’ll have to check the law in your state to get an accurate answer for your specific situation.

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Classification of Payments

The manner in which your former employer classifies your severance payments may also play a role in how your state unemployment board determines your eligibility. In many cases, your severance pay will not be considered a continuation of your wages, in which case your unemployment claim should be unchallenged.

However, some employers may consider your severance package to be continuation pay. In this case, you won’t qualify for unemployment benefits until your continuation pay ends.

For example, let’s say your employer lets you go on October 1 but agrees to keep paying you until the end of the year, even though you will no longer be responsible for performing any work. Your earnings from Oct. 1 through Dec. 31 will be considered continuation pay, and you may have to wait to file for unemployment benefits until it concludes.

Timing of Payments

If you receive your severance payments in one lump sum, it won’t matter how that payment is classified or what the law regarding severance pay is in your state. Since you won’t be receiving any more payments after the lump sum, you’re free to file for unemployment benefits in any state.

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However, if your severance comes as a series of installment payments, then you’ll once again have to follow the laws in your state regarding severance payouts and unemployment.

Is Severance Pay Taxable?

After considering whether severance pay will affect unemployment benefits, most terminated workers immediately consider the next issue, which is whether or not severance pay is taxable. Unfortunately, regardless of how severance pay is classified, it is considered taxable income by the federal government, and by the states that have an income tax.

This is true whether or not your payments are considered continuation income or not.

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