Hey friend,

Getting laid off is brutal. But getting laid off in Q4? That's a tax disaster waiting to happen—and most people don't realize it until they're staring at a five-figure tax bill in April.

October 2025 alone saw over 153,000 announced job cuts—the highest for any October in more than 20 years (CNN Business, November 2025). The tech sector led with 33,281 layoffs in October (Challenger, Gray & Christmas, November 2025). Companies including Amazon (14,000), IBM (thousands), Meta (600), Microsoft (6,000), and Rivian (600) (TechCrunch, October 2025) are all conducting Q4 2025 cuts. And thousands of those workers are about to learn an expensive lesson about severance timing.

Here's what nobody tells you: that November or December severance check isn't just income—it's a tax bomb that can blow up your entire financial year.

A California worker posted this question in March 2024, and it should terrify anyone negotiating severance today:

They were in the 22% tax bracket and received a lump sum severance payment. Their employer withheld over 40% in taxes (Justia Legal Forum, March 2024). Not 22%. Not 25%. Over 40%.

What they tried:

✔️ Reviewed their employment contract (said "standard deductions")

✔️ Checked their tax bracket (definitely 22%, severance didn't change it)

✔️ Compared to normal paychecks (usually only 18% withheld)

What happened? Their employer combined federal withholding, state taxes, Social Security, Medicare, and the infamous "supplemental wage" treatment that treats severance differently than regular paychecks. The worker thought they were getting three months of salary. They actually received barely half.

Another laid-off worker in Georgia was shocked when their weekly severance payments—not even a lump sum—were taxed at a higher rate than their regular wages (TurboTax Community, 2024). Their employer explained: "Severance pay is taxed higher." Full stop.

Here's the brutal math behind Q4 severance:

The Lump Sum Bracket Jump

Let's say you earn $90,000 annually and get laid off in November 2025 with a $45,000 severance (six months of salary). According to H&R Block's analysis (H&R Block, 2025): "You'd receive 17 months' worth of pay during the year, which is a sizeable bump to your income."

Your taxable income for 2025? $119,250 (after the $15,750 standard deduction for single filers). That pushes you from the 22% bracket into the 24% bracket (Tax Foundation, 2025).

But it gets worse.

The Withholding Gap

Your employer withholds a flat 22% on severance payments made separately from regular wages (H&R Block, 2025). That's $9,900 withheld on your $45,000 severance.

But your actual tax liability on 2025 income of $135,000 ($90,000 + $45,000)? After the standard deduction of $15,750, you're looking at approximately $22,700 in federal taxes alone. The 22% withholding on your severance leaves you short by several thousand dollars, not counting state taxes, FICA, or lost tax credits.

The Credits That Disappear

According to Horn Wright LLP (Horn Wright, 2025), that severance income can eliminate:

State Taxes Multiply the Pain

Live in a high-tax state? California's rates range up to 13.3%, while New York combines state tax up to 10.9% with NYC tax up to 3.876% (Accounting Insights, 2025). Combined federal and state taxes can exceed 40% before you even factor in FICA taxes.

1. Calculate Your Total 2025 Income RIGHT NOW

Add up: salary earned + severance + any bonuses + unemployment benefits you might receive + investment income. Use the IRS Tax Withholding Estimator (IRS, 2025) to see where you'll land.

2. Negotiate Severance Payment Timing (Before You Sign)

Ask these questions:

Horn Wright emphasizes: "By spreading your severance over several months, you could stay in a lower tax bracket and end up paying less overall." (Horn Wright, 2025)

3. Max Out Pre-Tax Contributions Immediately

You have until December 31, 2025 to reduce your 2025 taxable income:

4. Understand COBRA vs. Marketplace Insurance for Tax Credits

H&R Block notes that "job termination is a qualifying event for special enrollment" in marketplace insurance. Here's the catch: if your severance pushes your 2025 income too high, you might not qualify for advance premium tax credits that would make marketplace plans affordable.

COBRA premiums are deductible only if you itemize AND your medical expenses exceed 7.5% of AGI (Hawkins Ash CPAs, 2025).

5. Know the 401(k) Early Withdrawal Penalties

If you're under age 59½ and need to tap retirement savings: expect a 10% additional penalty tax on top of regular income taxes (Hawkins Ash CPAs, 2025). The better move? Tax-free rollover to an IRA preserves your savings and avoids immediate taxation.

6. Check State Tax Variations

Five states fully exempt unemployment benefits from taxation: California, New Jersey, Oregon, Pennsylvania, and Virginia (Tax Foundation, 2025). Nine states have no income tax at all. Location matters—a lot.

7. Make Quarterly Estimated Payments to Avoid Penalties

If you'll owe more than $1,000 in taxes, the IRS expects quarterly payments. Miss them and you'll face underpayment penalties on top of your tax bill.

This week, spend 30 minutes running the numbers:

Bonus: If you haven't signed your severance agreement yet, schedule time to discuss payment timing with your employer or a tax professional before accepting the standard offer.

"Working with a tax professional can be one of the smartest moves you make after receiving severance. They'll walk through your entire financial situation, making sure your withholding is on target, so you don't get hit with an unexpected tax bill." — Horn Wright LLP, 2025

🌟 You didn't ask for this Q4 2025 surprise. But you can still control how you respond to it.

The companies conducting November and December 2025 layoffs know exactly what they're doing—timing these cuts for their fiscal benefit, not ours. But we're not powerless. Every conversation you have about payment timing, every dollar you funnel into tax-advantaged accounts before December 31, every calculation you run before signing that severance agreement—these are acts of financial self-defense.

Tax season will come in April 2026 whether you're ready or not. The workers who survive this best won't be the ones who hoped for the best. They'll be the ones who looked at the brutal math, asked hard questions, and made strategic moves while they still had options.

You've already survived the layoff. Now make sure the tax bill doesn't become your second crisis.

You got this.

—Win

Fellow layoff survivor, creator of Let Go Weekly

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