How Severance, Retro, Holiday and PTO Pay Are Taxed
Severance, retro pay, holiday pay, PTO payouts, bonuses and commissions are all taxed as wages. What differs is how your employer withholds tax on them, which is why these paychecks can look heavily taxed.
Supplemental wages and the 22% rule
The IRS calls pay outside your regular wages supplemental wages. When it is paid separately, most employers withhold federal income tax at a flat 22% (37% on supplemental pay above $1 million in a year), instead of using your W-4. Social Security, Medicare and state tax come out as usual.
| Type of pay | Taxed? | Typical federal withholding |
|---|---|---|
| Severance | Yes, as wages | 22% flat when paid separately |
| Retro (back) pay | Yes, as wages | 22% flat if paid separately, otherwise normal |
| Holiday pay | Yes, as wages | Normal withholding with your paycheck |
| PTO or vacation payout | Yes, as wages | 22% flat when paid separately |
| Bonuses and commissions | Yes, as wages | 22% flat when paid separately |
Withheld is not the same as owed
All of this pay is added to your income for the year and taxed at your real bracket when you file. For example, a single filer earning $65,000 pays an average of 8.6% in federal income tax on regular pay, and the next dollars fall in the 12% bracket. If 22% was withheld on a severance or bonus payment but your bracket is 12%, the difference comes back as a refund.
See exactly what you keep from one-off pay with the bonus tax calculator, which works for severance, PTO payouts and commissions too.
Common questions
Is severance pay taxable?
Yes. Severance is taxable wages: it is subject to federal income tax, Social Security, Medicare and state income tax. Employers usually withhold federal tax on it at a flat 22% (37% above $1 million).
Why was so much taken out of my severance check?
Severance is often paid in one lump sum, and payroll withholds at the flat 22% supplemental rate plus 7.65% for Social Security and Medicare and any state tax. If your real tax bracket is lower, you get the difference back when you file.
Is retro pay taxed differently?
No. Retroactive pay is ordinary wages. If it is paid separately from your regular paycheck, employers often treat it as supplemental pay and withhold federal tax at 22%, but the tax you finally owe is the same as for any other pay.
Is holiday pay taxed more?
No. Holiday pay, including time-and-a-half or double pay for working a holiday, is taxed at the same rates as regular pay. It can look heavier because it raises that paycheck and withholding is calculated on the bigger amount.
Does holiday pay count for the no tax on overtime deduction?
Usually not. The federal overtime deduction for 2025 through 2028 covers the overtime premium required by federal law for hours over 40 in a week. Extra pay for working a holiday is not required by federal law, so it generally does not qualify unless those hours are also overtime hours.
Is a PTO payout taxable?
Yes. When you are paid for unused vacation or paid time off, usually when you leave a job, it is taxable wages and is often withheld at the 22% supplemental rate.