How Does Severance and Vacation Pay Affect Unemployment?

A line of workers streaming down a staircase after a company layoff.

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When you are laid off from a job and receive a severance package, it can impact your unemployment benefits. Severance is typically a lump-sum or regular payment given to employees by some companies when they terminate employment.

Generally speaking, employers are not legally required to give severance pay, even after a layoff. However, many choose to do so to maintain goodwill among departing employees.

When you receive a severance package, it may impact your unemployment benefits. Here's what you need to know.

Key Takeaways

  • How severance pay will impact your unemployment benefits, depends on state law. Check with your state unemployment department for details.
  • State law also determines how pay for unused vacation leave affects unemployment compensation.
  • When you're not sure what compensation you're going to receive, don't wait to file an unemployment claim. You can report the income when you receive it.
  • Severance pay is considered taxable income and you'll need to report it when you file your taxes.

Severance Pay and Unemployment

As a recently laid-off employee, you’d probably be glad to learn that your soon-to-be former employer offered a severance package. However, it’s important to know how severance works, in order to reduce the chances of financial surprises down the road. It’s not exactly the same as receiving your regular paycheck.

For example, you’ll need to pay taxes on your severance, whether you receive it in a lump sum or at regular intervals, just as you pay taxes on your standard paycheck.


Taxes on severance may be higher, depending on the method your employer chooses to determine your pay.

Depending on where you live, receiving severance might impact your unemployment, reducing or delaying your potential payout. 

How Severance Pay Affects Unemployment

Different states have different policies regarding severance, and whether your payment will affect unemployment benefits depends on state law.

For example, receiving severance pay does not impact your benefits in California, even if you receive it in a lump sum instead of in regular installments like a paycheck. You need to report the amount you receive, and pay taxes on it as you would any other income, but it will not be deducted from your unemployment compensation.

In New York, if you continue to receive the exact same benefits you received while working, you would not be eligible for unemployment—in most cases. You might be eligible to claim unemployment benefits if your weekly severance pay is less than the maximum weekly unemployment insurance rate.

In Texas, severance may delay or stop receipt of unemployment benefits, and payments will be delayed until the payment's period of coverage has expired.

Because state laws and individual circumstances vary, check with your state department of labor for the rules that determine if you qualify.


Even if severance is not deducted from unemployment benefits, you are required to report it when you file a claim.

Pay in Lieu of Notice

Similar to severance pay, pay in lieu of notice is wages paid to an employee who was laid off without notice when the employer was required to provide advance notification of a layoff.

When you receive payment for any unused vacation or flexible leave benefits upon leaving your job, it may impact your unemployment benefits. State regulations differ on how vacation pay will impact unemployment benefits. Check with the unemployment office for your state to get the definitive answer for your location.

How Vacation Pay Affects Unemployment

In some states, lump-sum payments for vacation time awarded at termination will not decrease benefits. When employees receive ongoing payments for vacation while they are unemployed, those payments will often reduce their unemployment checks. However, some states allow all workers without a set date for resuming employment to obtain full benefits while receiving vacation pay.

When states do reduce benefits, some deduct the full amount from unemployment, while others will reduce payments by a percentage of the vacation pay. Some states allow a certain amount of vacation pay or other income before reducing benefits dollar for dollar.

Laid-off employees with a set date to go back to work, who use vacation pay during their period of unemployment, will usually have their benefits reduced.

Check With Your Unemployment Office

Because laws vary from state to state, it's important to check with your state unemployment office for information on how severance pay will be handled. You may find the information you need online, or you will be able to find a phone number to call for assistance. Don't wait to apply for benefits, even if you're not sure about your current eligibility.


Get your claim in the system so you can receive the maximum benefits you are eligible for. Report your severance pay when you file the claim, and your unemployment compensation will be calculated for you.

Also, if you're a member of a union or covered by another type of employment agreement, check with your business office for assistance with unemployment benefits.

Frequently Asked Questions (FAQs)

Do I have to report severance pay when I file for unemployment?

Unemployed workers are required to report the income they receive when they file for unemployment benefits. If you don't receive severance immediately, report it when you get it. In New York state, for example, claimants are required to call the Telephone Claims Center to report receipt of severance.

What can you do if your unemployment claim is denied?

If your unemployment claim is denied by the state unemployment department or contested by your employer, you have the right to appeal the denial of your unemployment claim.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Department of Labor. Severance Pay.

  2. Internal Revenue Service. "Tax Impact of Job Loss."

  3. Employment Development Department. "Severance Pay, Dismissal or Separation Pay."

  4. New York State Department of Labor. "Dismissal or Severance Pay And Your Unemployment Insurance Benefit."

  5. Texas Workforce Commission. "Severance Pay."

  6. Department of Labor and Workforce Development. "Unemployment Insurance Questions and Answers."

  7. New York State Department of Labor. "Dismissal/Severance Pay and Pensions Frequently Asked Questions."

  8. U.S. Department of Labor. "What Are Unemployment Benefits?"

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