Laid off: the tax on severance, unemployment and your 401(k), figured before you decide
Free tax review
Find out what we’d handle and what it costs
Thirty minutes by phone; you leave with one written price.
We sort the year’s severance, unemployment and 401(k) money into what’s taxed and on which form, figure the tax on each choice you’re weighing, then prepare the return. The first review is free, any planning is one flat fee quoted in writing before work starts, and individual returns start at $350. Based in Santa Clarita, we work with people who were laid off in any state.
Typical situations
Do you work with people who were laid off?
Yes, we take on the tax side of a layoff: severance and a vacation payout, the old job’s 401(k) and a loan still owed against it, a Marketplace plan after the job’s coverage ends, freelance work since the layoff, and RSUs or stock options at termination.
Severance running as paychecks into next year
An employee laid off in the fall whose severance — pay from the employer when the job ends — runs as continued paychecks into next year, with a payout of unused vacation in the last check. The documents: the separation letter (read for the payment dates and amounts only), the final pay stub, and the W-2, the employer’s year-end wage statement. If the whole package is planned as this year’s income, the projection for both years comes out wrong. Severance is income in the year it’s paid or made available, so paychecks after December 31 belong on the next year’s return. We line up each payment date from the letter and the pay stubs and put it in the right year’s projection. The return for the layoff year: individual returns from $350.
A 401(k) payout before 59½
Someone under 59½ weighing a payout from the old job’s 401(k). The documents: the plan’s distribution notice and election form, the latest account statement, and the Form 1099-R — the plan’s report of a payout or rollover — that follows. A payout before 59½ normally carries an extra federal tax on top of the income tax, but not when the employee leaves the job in or after the year they turn 55 and the money comes from that employer’s plan — and that exception never applies to an IRA. If the 1099-R shows code 1 (the plan’s mark for an early payout with no exception shown) and nobody claims the exception, the extra tax is charged on money the exception covers. We figure the income tax and whether the extra tax applies on each path being weighed — leaving it in the plan, a direct rollover (the plan pays the money straight to a new plan or an IRA), a payout, or a payout rolled over within 60 days — checked against the separation date, the age that year and which employer’s plan holds the money. When the exception applies but the 1099-R’s code doesn’t show it, we claim it on Form 5329, the form for exceptions to the extra tax.
A 401(k) loan still owed when the job ended
Someone who left the job with a 401(k) loan outstanding. The documents: the plan’s loan or distribution notice and the Form 1099-R, which shows code M when the loan offset (the plan subtracting the unpaid loan from the account) came from leaving the job. No cash changes hands, so nothing is withheld, and the tax on the offset arrives with the return. If the loan offset is treated like a payout with a 60-day clock, or nobody looks until the 1099-R arrives, the longer rollover window can close before anyone figures the tax. The offset counts as a distribution, but an offset from leaving the job can be rolled over, with the person’s own money, until the due date of that year’s return, including extensions. We confirm from the notice and the 1099-R whether the offset came from leaving the job and figure the tax if it isn’t rolled over.
A Marketplace plan after the job’s coverage ended
Someone who moved to a Marketplace plan (HealthCare.gov or the state’s) after the job’s health coverage ended. The documents: Form 1095-A, the Marketplace’s statement of coverage and advance credit, the income estimate given to the Marketplace at sign-up, and any COBRA election notice. If the estimate left out the severance, the unemployment or a 401(k) payout, the advance credit ran too high and the difference comes back as tax on the return. The advance premium tax credit — the credit that lowers Marketplace premiums — is squared with the credit the whole year’s household income allows on Form 8962, and for 2026 any excess is repaid in full, with no cap. We put every layoff-year item into household income, run Form 8962 and check any months on COBRA against the months on the Marketplace plan. We handle the tax only, never which coverage to choose or keep.
Freelance work since the layoff
Someone freelancing or consulting since the layoff. The documents: the Forms 1099-NEC from clients, the invoices and a log of expenses. Nothing is withheld from that pay, so without estimated payments (tax paid during the year on income with nothing withheld) or extra withholding, the tax arrives with the return, and a penalty may apply to each payment that came up short. Freelance income and expenses go on Schedule C, the business page of your personal return, and once net earnings reach $400, self-employment tax — Social Security and Medicare for the self-employed — applies on top of the income tax. We set up Schedule C and figure the self-employment tax and the estimated payment due January 15, 2027, or the extra withholding at a new job that would cover it instead. More on tax planning for freelance and 1099 income. Self-employed returns from $650, one business on the same return.
RSUs and stock options when the job ended
An employee holding RSUs (restricted stock units) and incentive stock options (ISOs) when the job ended. The documents: the grant agreement, the separation papers and the stock plan’s statements showing vest dates, forfeiture terms and the plan’s deadline to exercise. An ISO exercised more than 3 months after the job ends is taxed as a nonqualified option (NSO), with the spread — the share value at exercise minus the price paid — treated as pay. If an ISO exercised more than 3 months after the job ended is still reported as an ISO, the spread that belongs on the return as pay is left off. We read the grant papers for the tax facts only: what vested and is wages on the W-2, what was forfeited, and the exercise window. More on how RSUs and stock options are taxed.
What’s taxable
Are severance and unemployment taxable?
Yes: severance is wages, and unemployment is taxable income on your federal return. Whether it’s paid in a lump sum or as continued paychecks, severance — and a payout of unused vacation or sick leave — is reported on your W-2 with income tax, Social Security and Medicare taken out, the same as a paycheck.
The state sends a Form 1099-G — the state’s report of unemployment paid — with the year’s total in box 1 and any federal tax withheld in box 4, which we match to the state’s payment history. Taking less severance in exchange for outplacement services, such as help with a résumé or interviews, doesn’t lower the taxable amount.
We check each payment against the W-2, the 1099-G and the pay stubs before it goes on the return.
Withholding
Will the tax withheld from severance and unemployment cover what I owe?
Not necessarily: what an employer withholds from severance, what the state withholds from unemployment and what a plan withholds from a 401(k) payout all count toward the year’s tax, and only a projection of the whole year shows whether they cover it.
When severance or a vacation payout is paid separately from regular pay, the employer can withhold federal income tax at one flat rate set by the IRS instead of following your W-4, the form that tells an employer how much to withhold. Unemployment has federal tax withheld only if you ask the state for it, on Form W-4V (the request to have tax withheld from unemployment) or the state’s own form. A new job’s Form W-4 can add an extra amount to each paycheck for income that had little or nothing withheld.
We add up what was withheld from the old job’s pay, the severance, unemployment, any 401(k) payout and the new job, project the full year’s tax with everything in it, and show any gap before December 31 — closed by an estimated payment or a W-4 change. You give the W-4 to your employer and make any payment yourself.
What you get
What do I get from a layoff tax review?
The review leaves three things in writing: the payment list, the 401(k) figures and the withholding projection.
Every payment, its form, its year
A written list of every layoff-year payment — final pay, severance, the vacation payout, unemployment, 401(k) money, stock that vested — with the form it’s reported on (W-2, 1099-G, 1099-R) and the year it belongs to.
The tax on each 401(k) path
The tax figure on each path you’re weighing, with whether the extra tax applies — the actual numbers, in order, with the reasoning written next to them.
The year’s withholding against the year’s tax
The projected balance due or refund against what has been withheld, and any estimated payment or W-4 change that would close a gap.
The return, or the figures for your own preparer
The return for the layoff year, with Form 8962 and any loan offset or 1099-G checked — or the figures handed to your own preparer.
The first three come from the planning review, before a 401(k) decision or a new job’s W-4 where possible; the return comes after the year’s forms arrive. Every review ends with an honest read on whether planning is worth paying for — if it isn’t, we say so and you’re done.
What we check
What do you check before anything is filed?
Before anything is filed, we check that every layoff-year payment is on the right form, in the right year, with its withholding counted, using the documents below.
- The separation or severance letter, for the payment dates and amounts only
- The final pay stub, and the W-2 when it arrives
- The state’s Form 1099-G against its payment history
- The plan’s distribution or loan notice, and the Form 1099-R with its distribution code
- Form 1095-A and the income estimate behind it
- The grant agreement and the stock plan’s statements
- Forms 1099-NEC from clients, or a log of freelance income and expenses
- The new employer’s first pay stub and Form W-4, and last year’s return — the starting point for the year’s projection
California
What’s different in California after a layoff?
California doesn’t tax unemployment benefits, keeps taxing severance tied to California work after a move out, adds its own extra tax on early 401(k) payouts, and its unemployment form counts benefits by the date each payment was issued.
- Unemployment isn’t taxed by California. Benefits go on the federal return and come back off on the California return through Schedule CA (540), California’s form for its differences from the federal return — and Paid Family Leave benefits are treated the same way. We take them off the California return.
- The EDD’s Form 1099G can show more than reached your bank. The EDD — California’s Employment Development Department — makes the form available by January 31 and counts benefits by the date each payment was issued; the total includes any federal tax withheld and any child support taken from the benefits. We match box 1 to the payment history before it goes on the federal return.
- Severance tied to California work stays California income after a move. Severance received while you live in California, or tied to California work wherever you live when it’s paid, stays California income. We match each payment to where the work was done and where you lived when it was paid — and if the layoff came with a move into or out of California, that page has the detail.
- California adds its own extra tax on early payouts. A payout from a 401(k) or other employer plan before 59½ carries California’s own extra tax, at its own rate, figured on FTB 3805P, California’s form for its extra tax on early payouts, with the same exception for leaving the job in or after the year you turn 55. We figure it alongside the federal extra tax on each 401(k) path.
Pricing
What does layoff tax help cost in 2026?
In 2026 the first review is $0, individual returns start at $350, self-employed returns start at $650 for a year that also has freelance or consulting work after the layoff (one business on the same return), and business returns start at $850 with the owner’s personal return included. Any planning after the free review, and each return, is a flat fee quoted in writing before we start.
What moves a quote: a 401(k) or 403(b) payout or loan offset, Marketplace coverage to reconcile on Form 8962, freelance or consulting income after the layoff, RSUs or options that vested, were exercised or were sold, a second state, a prior year to fix, and whether we file the return or hand the figures to your own preparer.
Planning review
$0 first review
Planning after it only if it’s worth paying for.
Individual return
from $350
Federal and state e-filed together. Severance, unemployment, a 401(k) payout or loan offset, Form 8962 and stock that vested are priced into the quote, never a separate price.
With freelance work
from $650
One business on the same return, such as consulting started after the layoff.
The quote is the price.
How it works
What happens after the free call?
After the free 30-minute call you have the engagement letter; signing it sets up a short onboarding call, and the portal invite and a short checklist come from that call.
The free 30-minute call
Six to eight questions: when the job ended, the severance and any vacation payout and how they’re paid, unemployment, the 401(k) balance and any loan, health coverage now, any stock, any freelance work, and the state. It ends with one flat price for the work we’d take on.
The engagement letter
It goes out during the call with that price in it. Sign when you’re ready; it doesn’t expire. Signing sets up a short onboarding call, and the portal invite and a short checklist come from that call.
Documents
Through the secure portal: the separation letter, the final pay stub, and any Form 1099-G, 1099-R or 1095-A you have so far. The checklist covers the rest as forms arrive.
The planning review
We put each layoff-year payment in its year and on its form, figure the tax on each 401(k) path and whether the extra tax applies, trace any loan offset, run the premium tax credit reconciliation, set up freelance income and estimated payments, and compare the year’s withholding with the projected tax. You decide what to do with the 401(k), the coverage and the new W-4.
The return
Half the return fee starts the work, and the balance is due before e-file. You see the return before it’s filed.
Communication
You’ll know where the planning and the return stand.
The person who answers the phone is on the same team that figures your numbers and prepares your return.
The same-day rule
Call or email during business hours and you’ll hear back the same day — all twelve months.
Layoff years are welcome
Severance that runs into the next year touches two returns; we keep both years on the same figures. The free call ends with a straight answer on whether we’re the right fit.
Admitted to practice before the IRS
Our team of IRS representation specialists is admitted to practice before the IRS. If an IRS letter shows up — a notice about the layoff year’s return, for example — forward it: how we handle IRS letters.
The N&T Tax & Advisory Group team
For a person who was laid off, we figure the planning numbers and prepare the return from the same figures, and we stay reachable all year.
Tax planning · Tax preparation · IRS representation · Direct line: (661) 554-4495
Reviews
Rated 5.0 on Google
★★★★★ Twelve reviews, every one five stars, every one verifiable. Read all of them on Google →
"Alex helped me resolve a complicated tax situation that had been causing me a lot of stress. He was extremely knowledgeable, responsive, and efficient throughout the entire process."
Kevin B. — via Google
"Working with Alex was straightforward. I hadn't looked at my books all year, but he made my life easy and handled the whole profit and loss at the end of the year so I could get my taxes done."
Levon B. — via Google
"I came to this company with previous tax years and bookkeeping that were done incorrectly. They're very knowledgeable about what they do and help me get everything in order at a very reasonable price."
Sayra A. — via Google
Where we work
Do you work with people who were laid off outside California?
Yes — we work remotely with people in any state who were laid off. Documents come through the secure portal, and we walk through the numbers by phone and screen share. If you live in another state, we prepare that state’s return too and price it into your quote.
What we don’t do
We don’t negotiate or sign a severance agreement — we read it for the tax points only — and we don’t take employment-law questions such as final-pay timing or a wrongful termination; when a question needs an attorney, we tell you. Choosing among COBRA, a Marketplace plan or a spouse’s plan, deciding what to do with the 401(k) or which IRA, provider or investments to pick, and whether to exercise or sell company stock stay with you: investment, financial and legal advice are outside our work.
Worth reading
What can you read before you call?
Three posts cover pieces of a layoff year: the first quarterly payments and the self-employment tax if you’ve started freelancing, and what to do when a W-2 never arrives.
Quarterly Taxes for the First Time: What to Pay, When, and How in 2026
Your first quarterly payments, if you’ve started freelancing since the layoff.
Self-employment taxSelf-Employment Tax Explained: What Schedule SE Charges 1099 Workers in 2026
The self-employment tax on the new income, for the same reader.
Missing W-2How to File Taxes Without a W-2: What to Do Before the April 15, 2027 Deadline
If your old employer never sent the W-2.
FAQ
Layoff tax questions
Is severance taxed at a higher rate than a regular paycheck?
No. Severance is wages, taxed the same way as the rest of the year’s pay. What can differ is the withholding: paid on its own rather than folded into a regular check, severance can have federal income tax taken out at a single flat rate the IRS sets instead of the rate your W-4 produces. We compare what was withheld, all of which counts toward the year’s tax, with the year’s projected tax.
Should I cash out my 401(k) after a layoff?
Whether to cash out, roll over or leave the money is your decision — what we do is put a tax figure on each choice. A direct rollover to a new plan or a traditional IRA isn’t taxed and has nothing withheld; one to a Roth IRA makes the untaxed amount income. A payout made to you is taxable except the part you roll over within 60 days, and the plan has to withhold federal income tax from it even if you plan to roll it over — so rolling over the whole amount means replacing the withheld part from other money, and the amount withheld may be less than the tax actually owed.
Can I deduct job-search costs after being laid off?
Not on your 2026 federal return as an employee — job-search costs were among the deductions suspended starting in 2018, and a later federal law made that suspension permanent, with no end date. If you’ve started freelance or consulting work, that business’s own costs go on its Schedule C with the income. We sort which costs belong to the business.
What if my Form 1099-G shows unemployment I never received?
Report it to the state agency that issued the form and ask for a corrected one. On your return, include only the benefits you actually received, even if the corrected form hasn’t arrived. An identity theft affidavit (Form 14039) isn’t needed for this alone, and an IRS Identity Protection PIN is worth considering. We compare box 1 with your payment history and prepare the return on what you received.
Do I owe the early-withdrawal tax on IRA money I use for health insurance while unemployed?
Not if the conditions are met, though the money is still taxable income. The conditions: after losing the job, unemployment received for 12 consecutive weeks; the money taken from an IRA, not a 401(k); and taken in the year of the unemployment or the next, no later than 60 days after starting a new job. The exception covers up to the health insurance premiums paid that year for you, your spouse and your dependents. We check the dates and the premiums before the exception is claimed.
Is it too late to plan if the layoff was months ago?
No. We can still compare the year’s withholding with the year’s tax, and you can close a gap with more withholding at a new job before December 31 or with the estimated payment due January 15, 2027. The return for the layoff year still needs every W-2, 1099-G, 1099-R and 1095-A matched. Earlier helps because a W-4 change only reaches paychecks still to come and a rollover clock runs from the date of a payout — we run the comparison and match the forms either way.
Want the layoff year’s numbers before you decide?
One free 30-minute call. You’ll leave knowing what we’d handle and what it costs — whether or not you hire us.
Rather talk now? Call (661) 554-4495 — reach us during business hours and you’ll hear back the same day.
Our team of IRS representation specialists is admitted to practice before the IRS. This page is general information, not tax advice for your specific situation.