Severance Pay Taxes are taxes which apply to wages granted to an ex-employee after they are laid off from a company. Severance pay is normally applied according to the length of time that the employee has been in service to the company. For instance, most companies that pay out severance allow one week's salary for each year of service. Severance pay taxes are applied the same way that regular income taxes are applied and are normally deducted as the payments are made to the departed employee. If these taxes are not deducted from severance payments as they are received, these taxes must be paid at the end of the year. However, expenses which are paid out as a result of searching for employment are tax deductible. For instance: Outplacement agency and employment agency fees, travel expenses for job interviews, relocation expenses for new jobs and fees paid for resume preparation.