According to Forbes, severance pay is taxable in the year in which the employee receives it. Prior to an employee receiving a severance check, the employer should take out appropriate state and federal taxes. Severance pay is reported on the employee's W-2 form, according to Turbo Tax.
Severance pay may include monies due to an employee as a result of unused vacation or sick days. This alternate type of payment is also considered taxable by the Internal Revenue Service, according to Turbo Tax. The IRS notes that the only portion of severance pay that is not taxable at the time of payment is pay that has already been taxed but has not been distributed to the employee.