Severance Pay Versus Unemployment Pay

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When you lose your job, it's likely that the first thing on your mind is how you'll pay your bills without a steady paycheck. There are two forms of income common among the unemployed -- severance pay and unemployment pay. There are some differences between severance pay and unemployment pay that you should be aware of, if you get laid off.

Taxes

One major difference between severance pay and unemployment checks is the tax rate applied to each. Your severance pay will be taxed at the same rate as your regular paycheck, including deductions for Social Security and Medicare. Unemployment checks are taxed at a special rate by the federal government. Generally, taxes are not taken out of your unemployment check every week, but you'll have to pay the taxes at the end of the year, when you file.

Claiming Unemployment

Unemployment pay varies widely from state to state. It's based on a percentage of your average weekly wage. The average payout as of 2009 was $293 a week, according to MSN Money. Maximum payouts vary, from $230 in Mississippi, to $625 in Massachusetts.

The law varies from state to state regarding whether you're eligible for unemployment while receiving severance pay. In 2009, Maryland changed its laws to make employees receiving severance pay ineligible for unemployment. Other states, such as New York, allow former employees to receive unemployment while they're still collecting severance pay. In this state, the person must be collecting severance at a rate less than their normal rate of pay.

Payments

Severance pay is a benefit provided by your employer. Your employer is under no legal obligation to provide you with severance pay unless he's promised to do so, either verbally or in writing. Unemployment insurance, on the other hand, is paid for by the federal government. You'll receive this any time that you've been terminated from a job through no fault of your own. There's also an appeals process for those who've been rejected for unemployment.

Payments

Severance pay can be done one of two ways. Your employer can continue to pay you as if you were still employed. Your former employer may also choose to give you all of your severance pay in one lump sum. By contrast, you must sign up for unemployment benefits every week. The methods for doing this vary from state to state. You may be required to visit the unemployment office in person, make a phone call, or register on the internet.

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