How to calculate severance pay for commission-based workers

The standard severance formula multiplies an employee’s weekly base salary by a set number of weeks, determined by their years of service and the organization’s policy.

The formula:

Severance pay = weekly salary × (years of service × weeks-per-year multiplier)

Most organizations use these multipliers by role level:

Employee level	Typical multiplier
Entry-level	1 week per year of service
Mid-level	2 weeks per year of service
Senior manager	2–3 weeks per year of service
Executive / C-suite	4+ weeks per year, or a guaranteed minimum floor

Worked example: salaried employee

A mid-level employee earning $75,000 a year with 6 years of service, under a 2-weeks-per-year policy:

• Weekly salary: $75,000 ÷ 52 = $1,442
• Weeks of severance: 6 × 2 = 12 weeks
• Gross severance: $1,442 × 12 = $17,308

Beyond the base payment, most packages also include payout of accrued unused PTO, benefits continuation (COBRA in the US), and notice pay where the employee doesn’t work their notice period. Bonuses and commissions appear in a package only when the employment contract specifies them. Commission-based roles require a different approach.

This formula works cleanly for salaried roles. The three methods below address commission-based roles specifically.

Yes. In the US, severance pay is taxable as ordinary income and subject to federal income tax, Social Security, and Medicare withholding, the same as regular wages.

The key tax points HR needs to know:

• Federal withholding: Employers typically apply the supplemental wage flat rate, which stands at 22% for 2026, unless the employee’s W-4 instructions require a different method
• FICA taxes: Employers withhold Social Security (6.2%) and Medicare (1.45%) from severance pay, making the combined employee-side deduction 7.65%
• State income tax: Varies by state. States with no income tax (Texas, Florida, Nevada) require only federal withholding. High-income states including California and New York apply state rates on top, which can meaningfully reduce the net payout
• Lump sum vs. installments: A single lump-sum payment concentrates taxable income in one calendar year and may push the employee into a higher bracket. Installment payments spread the tax impact across multiple pay periods, which is worth raising in the severance notification meeting, particularly for high earners

When using a severance pay calculator, look for one that shows both gross severance and estimated net after standard federal withholding. That gives the departing employee a realistic picture of what they’ll take home rather than a number that surprises them at tax time.

Note: The tax treatment of severance can vary depending on individual circumstances, payment structure, and state law. Advise departing employees to consult a qualified tax professional for guidance on their specific situation.

Commission-based workers can receive severance, but no federal or state law requires private-sector employers to provide it. Whether they qualify depends on their employment classification and your organization’s written policy.

W-2 employees (full-time commissioned staff): W-2 employees generally qualify for severance under the same policy that covers other full-time staff. Sales professionals on W-2 status, regardless of whether their earnings are salary-only, base-plus-commission, or commission-only, typically fall within the scope of an employer’s severance program.

1099 contractors: Generally not eligible, since severance is an employee benefit. Independent contractors who function as commission-only sales agents without W-2 status sit outside the scope of most severance policies unless a contract explicitly provides for it.

Beyond the legal baseline, offering severance to commission-based workers is a sound business decision. It reduces wrongful termination risk, protects employer brand, and affects how the remaining team views the organization. Careerminds research found that 53% of remaining workers reported a trust decline in company leadership after witnessing layoffs at their organization, per Careerminds’ How Layoff Communications Affect Trust and Re-employment report. Commission-based teams, who are often in client-facing roles, notice how departing colleagues are treated. How an organization handles one salesperson’s exit affects how the rest of the sales team thinks about their own security.

Three methods cover commission-based severance: basing the calculation on industry averages, on the employee’s own earnings history, or on their peak performance months. Each produces a different result, and the right choice depends on what data is available and what best reflects how the employee actually earned.

This method replaces the employee’s variable earnings with a standard benchmark for the role. Find the typical annual earnings for the position (industry salary surveys, job postings, or BLS occupational data), convert to a weekly rate, and apply your standard tenure-based multiplier.

Worked example:

A medical sales representative with 5 years of service, under a 1-week-per-year policy. Industry average annual earnings: $100,000.

• Weekly equivalent: $100,000 ÷ 52 = $1,923
• Weeks of severance: 5 × 1 = 5 weeks
• Gross severance: $1,923 × 5 = $9,615

When to use it: This approach delivers speed and consistency across multiple separations. It avoids individual pay history reviews and applies the same benchmark across a group.

The limitation: Industry averages don’t reflect individual performance. A top-performing sales rep whose actual earnings far exceeded the benchmark may view this method as undervaluing their contribution. A rep who consistently underperformed against the benchmark may receive more than their actual earnings would suggest. Use this method when equity across a group matters more than individual precision.

This method calculates severance based on the employee’s actual average earnings over a defined period, typically the prior 12 months or the prior 3 years. It reflects what the individual actually earned rather than what the role typically pays.

Worked example:

A sales representative with 5 years of service whose average monthly earnings over the prior 12 months were $8,500, under a 1-week-per-year policy.

• Annual earnings: $8,500 × 12 = $102,000
• Weekly equivalent: $102,000 ÷ 52 = $1,962
• Weeks of severance: 5 × 1 = 5 weeks
• Gross severance: $1,962 × 5 = $9,808

If the employee had an unusually strong or weak year, a 3-year average gives a fairer picture of what the employee typically earns.

When to use it: This is the most individually accurate method and the one most likely to hold up in a dispute. Define in advance exactly which earnings count: base pay only, base plus commissions, or total cash compensation including bonuses and incentives. Apply that definition consistently across every employee you’re calculating for.

Some organizations choose to base severance on the employee’s best-earning months rather than their average. This approach rewards high performers and signals that the organization values their best work, not just their average.

Worked example:

A sales representative with 5 years of service whose best 3 months averaged $14,000 per month, under a 1-week-per-year policy.

• Monthly peak average: $14,000
• Weekly equivalent: $14,000 × 12 ÷ 52 = $3,231
• Weeks of severance: 5 × 1 = 5 weeks
• Gross severance: $3,231 × 5 = $16,154

When to use it: This method typically results in the highest payout of the three. It fits best when the departing employee was a strong contributor, when the separation carries reputational risk, or when the organization wants to reduce the likelihood of legal challenge. It’s also the right approach when the employee’s recent performance was impacted by external market conditions rather than individual effort.

Before finalizing any commission-based severance calculation, work through these four rules.

1. Separate unpaid commissions from severance pay

Unpaid commissions earned before the termination date may be owed to the employee under the Fair Labor Standards Act and applicable state wage laws, regardless of whether you offer severance. These are a pre-existing wage obligation, not part of the severance calculation. Calculate and pay them separately to avoid including them in the severance figure, which could create confusion in the agreement.

2. Define in writing what earnings count

Before you calculate, document which components of the employee’s compensation count toward the earnings history: base salary only, base plus target commissions, base plus actual commissions, bonuses, incentive payments, or total cash compensation. Apply the same definition to every employee in the same role. Inconsistency between employees in similar positions creates legal exposure.

3. Use payroll records, not estimates

Base every earnings history calculation on verified payroll data. Verbal agreements about what an employee “typically earned” or informal estimates of commission run rates are not defensible if challenged. Pull the official payroll records and document which pay periods you used.

4. Clarify the payment method in the agreement

Specify in the severance agreement whether the payment will be issued as a lump sum or in installments, on what schedule, and what happens to the payment if the employee violates any conditions of the agreement (such as a non-disparagement clause). Commission-based employees are accustomed to variable pay timing and will have questions about when they’ll receive funds. Address the payment timeline in the agreement so they don’t need to ask.

Outplacement is what you pair with severance pay: severance covers the financial gap between roles, while outplacement gives the departing employee a structured path to their next one.

Careerminds research found that only about 1 in 3 companies offer outplacement services despite the known value to employer brand, in Careerminds’ Layoff Loops: What’s Driving Repeat Job Cuts report. That gap matters, because Careerminds data shows that 39% of employees who perceived their layoff process as fair found a new role within one month, per Careerminds’ How Layoff Communications Affect Trust and Re-employment report. Perceived fairness isn’t only about the dollar amount of the severance. It is about whether the organization gave the departing employee a real path forward.

Commission-based workers need specific outplacement support during the transition. Sales professionals have highly transferable skills, but they often need coaching to translate their performance record (pipeline metrics, close rates, deal sizes, territory growth) into language that resonates across industries and roles. A resume that lists “hit 120% of quota in FY2024” tells the story to the right reader, but reaching that level of positioning requires a coach who understands how to frame sales performance for different hiring contexts.

Careerminds research also found that 90% of HR leaders say career transition services are essential and a business imperative, according to Careerminds’ The 2025 Improving Career Transition Report. Pairing severance with outplacement separates a clean exit from a costly one.

Careerminds’ outplacement programs cover every step of the transition for commission-based participants, from positioning strategy and resume development through to interview preparation and job search coaching. With a 95% placement rate and an 11.5 weeks average time to land, participants move into their next role faster. [Speak to us] about building a severance package that includes both.

How do you calculate severance pay for a commission-based employee?

Choose between three approaches depending on your data and the circumstances: benchmark the role against industry averages, average the employee’s actual earnings over 12 months or 3 years, or use their strongest months as the baseline. The right method depends on whether you’re prioritising consistency across a group or accuracy for an individual. Whichever you choose, multiply your weekly earnings figure by the number of severance weeks your policy assigns for their years of service.

Is severance pay taxable in the US?

Yes. Severance pay is taxable as ordinary income and subject to federal income tax, Social Security tax, and Medicare tax. Employers typically withhold at the 22% supplemental wage rate for federal income tax in 2026, plus the standard FICA deductions. State income tax applies on top of that depending on where the employee works. Advise departing employees to consult a tax professional, particularly if they receive a large lump-sum payment that could affect their overall tax position for the year.

Are unpaid commissions included in a severance package?

Outstanding commissions earned before the termination date are owed to the employee under the Fair Labor Standards Act and most state wage laws, regardless of whether you offer severance. They are not part of the severance figure. Process them through payroll separately and state clearly in the severance agreement that they are distinct from the severance amount.

How much severance should I offer commission-based workers?

There’s no federal requirement, so the amount is at your discretion. As a starting point, apply the same weeks-per-year multiplier your policy uses for salaried employees, then choose one of the three commission calculation methods to determine the weekly earnings baseline. For high performers or roles where the separation carries reputational risk, the peak performance method typically produces the most defensible result. For group reductions, the industry average method offers the most consistency. Pair the financial figure with outplacement support to reduce legal risk and support the individual’s transition.

Careerminds’ free severance pay calculator gives HR leaders a starting estimate for any compensation structure, including commission-based roles. Download it below alongside our outplacement program details to build a complete separation package that protects your organization and supports your departing participants.