How to Calculate Severance Pay — Step by Step

The formula, in one paragraph

Severance pay is the money an employer pays when a job ends, and it is usually two payments added together. The severance itself is a number of weeks of pay. The number of weeks is your years of service times the weeks per year in your severance agreement. Your weekly pay is your annual salary divided by 52. The second payment is the payout for your unused paid time off, which is your unused PTO days times your daily pay. Add the two payments for the total gross, take off tax withholding, and what is left is the net take-home.

Step 1: Work out your weekly pay

Divide your annual salary by 52. At the example numbers the salary is $78,000, so the weekly pay is $78,000 divided by 52, which is $1,500.00. Your weekly pay is the unit the whole package is built from, so get it right first.

Step 2: Work out the severance weeks

Multiply your years of service by the weeks per year in your agreement. At the example numbers the years are 6 and the weeks per year are 2, so the severance weeks are 6 times 2, which is 12 weeks. The weeks per year is the number that matters most in the negotiation.

Step 3: Work out the gross severance

Multiply the severance weeks by the weekly pay. At the example numbers that is 12 times $1,500.00, which is $18,000.00. That is the gross severance, before PTO and before tax. The gross severance is the headline number in the offer letter, but it is not the money you keep.

Step 4: Add the PTO payout

Work out the payout for your unused paid time off. At the example numbers that is $78,000 divided by 260, which is $300.00 a day. With 10 unused PTO days the payout is 10 times $300.00, which is $3,000.00. Add it to the gross severance for the total gross: $18,000.00 plus $3,000.00 is $21,000.00.

Step 5: Take off the withholding

Severance is taxed, and the withholding rate is usually a flat rate on the payout. At the example numbers the rate is 22 percent, so the withholding is 22 percent of $21,000.00, which is $4,620.00. The net take-home is $21,000.00 minus $4,620.00, which is $16,380.00. The withholding is not your final tax bill. The actual tax depends on your total income for the year.

Step 6: Budget for COBRA

Budget for health coverage. COBRA lets you keep your employer’s health plan after the job ends, but you pay the full premium yourself. At the example numbers the premium is $650 a month and you budget for 3 months, so the cost is 3 times $650, which is $1,950.00. The net take-home is $16,380.00, and after setting aside the $1,950.00 for COBRA you have $14,430.00 left.

The same arithmetic at other salaries

The same steps scale to any salary. On a $60,000 salary at 6 years and 2 weeks a year, the weekly pay is $1,153.85, the gross severance is $13,846.15, the PTO payout is $2,307.69, the total gross is $16,153.85, the withholding is $3,553.85 and the net is $12,600.00.

Working backwards from a target

The calculation also runs backwards. If you want a $25,000.00 gross severance at 6 years and 2 weeks a year, divide the target by the severance weeks and multiply by 52: $25,000 divided by 12, times 52, is a $108,333.33 salary. A $30,000.00 severance needs a $130,000.00 salary. A $30,000.00 severance at a $78,000 salary and 2 weeks a year needs 20 weeks, which is 10.00 years. If you want a $27,000.00 severance at 6 years, the weeks per year you need is 3.00. A $20,000.00 net needs $25,641.03 gross, which is a $98,111.11 salary.

What NOT to do

Do not treat the gross as the money you keep. The gross severance here is $18,000.00, but the net take-home is $16,380.00, and after COBRA it is $14,430.00. Do not forget the PTO: ten unused days are worth $3,000.00 here. Do not sign without checking the weeks per year. The difference between 1 week a year and 4 weeks a year is $27,000.00 of gross severance on this salary.

That box is the whole formula.