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Unfortunately, severance pay is taxable. In general, employees and employers both pay a 6.2% Social Security tax and a 1.45% Medicare tax on a person's wages.Employers are required to withhold 22% of the severance wages and pay the money to the IRS.

An employee has the rights to anything agreed upon in the severance agreement. The severance agreement is a legally binding document that has to be followed by both the employee and employer. If either party is found to be doing anything that is against the agreement, it could mean a court date in the future.

In addition, severance payments are classified as "supplemental wages" for income tax purposes. Employers must withhold income tax from such payments at a flat 22% rate and pay the money to the IRS. State income tax must be withheld as well in the 43 states that have income taxes.

These funds are nontaxable to the employee and excluded from wages. An employer may provide funds for premiums under a severance plan. If the employer deducts the premiums from the severance pay and pays the insurer directly, the funds are excluded from wages and are nontaxable.

Elements of a severance package that might be up for negotiation:Amount of severance pay.How severance is paid (installments or lump sum)Coverage of healthcare plan costs.Exact date of termination.Vesting in a retirement plan or stock options.Outplacement or job-training services.

1. What should a severance package include? Your severance package should include information about your financial compensation under the agreementfor example, how much you will be paid and how it will be paidas well as how you will be compensated for your unused vacation and sick time.

When you sign a severance agreement, you agree to specific clauses contained within.Thus, if you feel that your termination was unlawful, but your severance agreement states that you cannot bring any unemployment discrimination claims, you likely cannot sue your employer.