At what rate is severance pay taxed by the IRS to the employee - the tax rate of the employee or the 22% withholding rate of the employer?

[bethbrake]

I know the employer is only required to withhold at the 22% rate federally.  The taxpayer is in the highest tax bracket and stands to owe a lot in  
April.

[sjrcpa]

It's taxed the same as any other ordinary income. So for your client, looks like the highest bracket and the 22% withholding is not enough.

[IRonMaN]

Ask the employer to withhold extra or pay in an estimated tax payment right after he deposits the payroll check if that is a concern.

[qbteachmt]

You asked "at what rate is severance taxed" and this is confusing Tax and withholding.

There are two Flat Rates for Withholding from "one time" or Bonus payouts. That has nothing to do with the taxpayer's entire life or their tax bracket. This is in Pub 15. There are three ways to compute it, though, depending on if it is combined with ordinary wages, paid on a separate check, etc. Mostly, people use the flat rates, since it is easier.

Up to $1m = 22%

Over that, jumps to 37%: "If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 37% (or the highest rate of income tax for the year). Withhold using the 37% rate without regard to the employee's Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control."

https://www.irs.gov/publications/p15#en_US_2022_publink1000202353

This section is called Supplemental Wages.

[bethbrake]

The severance occured in 2021 and the taxpayer was unaware that the ex employer was withholding on his wages at one rate and his severance at 22%.  He is underpaid by a substantial amount of money and he contacted his employer to understand what I just described.  The employer told him that a) 22% is what they are required to withhold b) led him to believe that by attaching his paystubs to the tax return his severance would only be taxed at 22% regardless of his tax bracket.  I cannot find anything in a Publication or elsewhere supporting the latter.

[sjrcpa]

You won't. It is not correct.

[qbteachmt]

"and the taxpayer was unaware that the ex employer was withholding on his wages at one rate and his severance at 22%."

It's prepayment against actual taxes that will be owed from the 1040. If they don't owe that, they get a refund. If they owe more, then lucky for them, some of it is already paid in. As I mentioned, there are three ways to compute it.

"He is underpaid by a substantial amount of money and he contacted his employer to understand what I just described. The employer told him that a) 22% is what they are required to withhold"

Yes, as long as the bonus is $1million or less.

"b) led him to believe that by attaching his paystubs to the tax return his severance would only be taxed at 22% regardless of his tax bracket."

No. Once again, that is confusing Withholding and Taxes. Did you read what I provided? Example:

His 1040 shows he has $8million taxable income from other investments, property sales, capital gains, etc. His wage is mixed into that total, the same as always. You know this; you prepare tax returns.

"I cannot find anything in a Publication or elsewhere supporting the latter."

Either the employer stated it wrong, or the employee conveyed it wrong. You know that is wrong.