Severance pay doesn't extend your H-1B status: the 60-day grace period starts when your employment ends, not when the last payment arrives. Severance tax is a separate problem, since 22% federal withholding is only a deposit and Social Security and Medicare tax apply too. Both clocks start in your first week.
How severance tax works on an H-1B
Your employer treats severance as supplemental wages, and IRS Publication 15 sets the flat federal withholding rate at 22%. That rate rises to 37% on supplemental wages above $1 million in a calendar year. State withholding comes on top and depends on where you worked.
Withholding is a deposit, not the bill
The withholding rate isn't your tax rate. Your real tax comes from adding the severance to your other income for the year and applying your brackets when you file. A top bracket above 22% means you owe the difference then, and a lower one means a refund.
Severance is also taxed in the year you receive it, so a payment dated 30 December and one dated 2 January land in different tax years. Ask HR which date applies to your lump sum or each installment.
Social Security and Medicare tax apply too
Severance counts as wages for Social Security and Medicare tax. The Supreme Court settled that in United States v. Quality Stores in 2014, and Publication 15 repeats it. Medicare tax is 1.45% of every dollar with no cap, while Social Security tax stops at the annual wage base.
A worked example with Priya
Priya is laid off in November and receives a $60,000 lump sum. Her employer withholds $13,200 in federal income tax (22%) and $870 in Medicare tax (1.45%), plus Social Security tax up to the wage base.
Say her income puts the whole payment in the 32% bracket. The withholding would then fall $6,000 short (10 points on $60,000), before any state tax, so I'd set that cash aside before spending the payment.
Why severance doesn't stop the H-1B 60-day clock
The grace period in 8 CFR 214.1(l)(2) lets you stay for up to 60 consecutive days after your employment ends, or until your authorized stay expires if that comes first. It applies once during each authorized validity period. A new sponsor's petition or a change of status has to be filed inside that 60-day window.
The clock starts when employment ends
The rule keys off the end of your employment, so payments after that date don't pause or extend it. A lump sum or installments changes your tax, never your immigration timeline.
Ask HR to put your last day of employment in writing. Ask also whether any later payment is severance or salary for a notice period during which you're still employed, because that wording can move your last day.
Release deadlines run inside your 60 days
If you're 40 or older, the EEOC says a release of age claims must give you at least 21 days to consider it, or 45 in a group layoff, plus 7 to revoke. Those days run inside your 60, so I'd line up a new sponsor while they run.
The 60 days may shrink
DHS proposed removing the grace period on 11 September 2026 (RIN 1615-AD22), and comments close on 10 November 2026. It's a proposal with no effective date, so the 60 days still apply today. I'd still plan as if the window could disappear, and start a new sponsor's petition early.
What changes if you leave the US before you're paid
The US still taxes pay for US work
IRS Publication 519 sources pay by where you did the work. I treat severance tied to your US job as US-source, and I'd confirm that with a CPA before you file a nonresident return.
Your US residency for tax also doesn't end the day you fly out. It ends on 31 December by default, unless you attach a statement to your return showing your tax home and closer connection are abroad (Treas. Reg. 301.7701(b)-4(b)). The rules on US tax residency turn on that date.
India's side depends on your residency year
Under the Income-tax Act, 2025, India taxes salary for work done in India, and severance for your US job isn't that. In an RNOR year, India taxes income earned outside India only if it comes from a business controlled or a profession set up in India.
US severance therefore generally stays outside India's tax. The RNOR window depends on your own day counts.
Once you're resident and ordinarily resident, India taxes worldwide income. You then claim a credit for US tax paid on Form 67.
Who this applies to
The 60-day rule covers E-1, E-2, E-3, H-1B, H-1B1, L-1, O-1 and TN workers and their dependents. The tax rules above apply to anyone paid US severance, whatever the visa.
A green card holder has no grace period to count and stays a US tax resident on worldwide income. F-1 and J-1 students are on separate rules this article doesn't cover.
What to do in the first two weeks
- Get your last day of employment and the severance terms in writing, and read the release before you sign it.
- Ask HR whether the payment is a lump sum or installments, and the date each one is paid.
- Ask payroll what federal and state tax it will withhold, then set aside the gap, as in Priya's case.
- If you're 40 or older, write down the release deadline and count it against your 60 days.
- Book an immigration attorney this week to start a new employer's petition, and ask before you travel, because a new petition is what supports re-entry.
- Ask HR whether the employer will pay your return transportation, which the H-1B rules require if it dismisses you before your authorized stay ends.
- Check your RSUs and 401(k) the same week, because they run on separate deadlines.
Common misreadings
- "I'm still getting paid, so my status hasn't ended." Payments after your last day of employment don't extend the 60 days.
- "22% withheld means my tax is paid." It's a deposit, and the final bill depends on your total income for the year.
Your next move
Email HR today for your last day of employment and your severance terms in writing. I'd rather you spend a day on those dates than a month untangling a missed deadline. If your numbers are tight, an InvestMates advisor can run your withholding gap and your timeline before day 60.
Frequently asked questions
Does severance pay extend the H-1B 60-day grace period?
No, because 8 CFR 214.1(l)(2) runs the 60 days from the end of your employment. If a payment is salary for a notice period during which you're still employed, your last day moves later. Get that date in writing.
Does the H-1B 60-day clock reset with a new job?
No, because the rule allows the grace period once during each authorized validity period. What protects your status is a new employer's petition filed inside your 60 days. If you decide to leave the US instead, your exit-year tax planning starts with the move date.
What are the rules for H-1B workers in layoffs?
Three rules apply:
- Your employer has to notify USCIS that your employment has ended.
- You get up to 60 days to stay or change employers.
- The employer owes your reasonable return transportation if it dismisses you before your stay ends.
Do I owe Indian tax on US severance pay?
Not usually while you're a non-resident or RNOR, because severance for your US job arises outside India. Once you're resident and ordinarily resident, India taxes your worldwide income, and the DTAA lets you claim a credit for US tax paid. Your residency year decides which case you're in.