PayPal Layoff: What Employees Need to Know About Severance, Benefits, and Taxes

PayPal’s recent decision to lay off employees has drawn attention to the financial and logistical aspects of job separation. For those affected, understanding severance, benefits, and tax implications is critical during this transition.

Severance Packages

Severance packages provide temporary financial support for employees seeking new jobs. They are typically calculated based on tenure, position, and salary, often offering one to two weeks of pay per year of service. However, details vary based on company policies and individual contracts.

PayPal employees should closely review their severance agreements to understand the monetary compensation and any additional benefits, such as extended health insurance or outplacement services. Some agreements may contain non-compete or non-disclosure clauses, which could limit future job opportunities. Consulting a financial advisor or employment attorney is advisable to assess the terms. Severance pay is subject to federal and state taxes, which can significantly impact the net payout. Tax planning is essential during this period.

Stock Awards and RSUs

Stock awards and Restricted Stock Units (RSUs) are often tied to employment tenure and performance. RSUs typically have a vesting schedule, determining when employees gain full ownership. Upon termination, unvested RSUs may be forfeited unless the company accelerates vesting, which can sometimes be negotiated as part of a severance package. PayPal employees should review their stock agreements to understand what is vested and what remains at risk.

Tax implications for RSUs add complexity. Vested RSUs are taxed as ordinary income upon vesting, with federal rates ranging from 10% to 37% in 2024, depending on the individual’s tax bracket. State taxes may also apply. If sold after vesting, any gain or loss is subject to capital gains tax. Short-term gains are taxed at ordinary income rates, while long-term gains benefit from lower rates, ranging from 0% to 20%.

Unemployment Insurance Eligibility

Unemployment insurance provides temporary financial assistance to individuals who lose their jobs through no fault of their own. Eligibility typically depends on meeting state-specific requirements, such as minimum earnings in prior quarters, being able to work, and actively searching for new employment.

Former PayPal employees should file a claim with the state unemployment office where they worked. Providing accurate details about previous employment, reasons for separation, and earnings history is critical to avoid delays or denial of benefits. Once approved, recipients must certify eligibility weekly or biweekly, confirming job search efforts and reporting any part-time earnings. Non-compliance can result in suspension of benefits.

Tax Obligations on Separation Pay

Separation pay, including severance, is taxable income. Employers generally withhold a flat rate of 22% for federal income tax on lump-sum severance payments, per IRS guidelines. This withholding may result in over- or underpayment depending on the employee’s tax bracket.

State income tax may also apply, and employees should consult their state tax authority for guidance. Additionally, separation pay is subject to Social Security and Medicare taxes, collectively known as FICA, withheld at rates of 6.2% and 1.45%, respectively. These taxes contribute to an individual’s lifetime earnings record and may affect future Social Security benefits.

Health Coverage Continuation

Health coverage is a significant concern for employees losing employer-sponsored insurance. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employees can continue existing health insurance for up to 18 months, but they must pay the full premium, including the portion previously covered by the employer. This can be a substantial financial burden.

PayPal employees should compare COBRA with alternatives, such as plans available through the Affordable Care Act (ACA) marketplace. ACA plans may be more affordable, particularly for those eligible for subsidies based on income. If severance and unemployment benefits place an individual’s income within 100% to 400% of the federal poverty level, they may qualify for premium tax credits under the ACA. Comparing coverage options, deductibles, and out-of-pocket costs can help employees make an informed decision.

Timing is critical. COBRA enrollment must generally occur within 60 days of job separation, while ACA open enrollment typically runs from November to mid-January, with special enrollment periods available for qualifying life events like job loss. Employees should also check whether severance agreements include employer contributions to COBRA premiums, which could reduce costs temporarily. Consulting a benefits advisor or using ACA marketplace tools can help clarify the best option.

Remaining Paid Time Off Disbursement

The treatment of remaining paid time off (PTO) varies by state and company policy. In some states, employers are legally required to compensate employees for unused vacation days, while in others, payout is only required if stipulated in the employment contract or company handbook. Employees should review PayPal’s PTO policy to understand their entitlements.

PTO payouts are subject to the same taxes as regular wages, including federal and state income taxes and FICA deductions. Receiving PTO as a lump-sum payment could push employees into a higher tax bracket, particularly if combined with severance pay. Employees may want to adjust withholding allowances or set aside funds to cover potential tax liabilities.

Understanding company policies on PTO accrual is also important. Some companies enforce “use-it-or-lose-it” rules, though these are less common in layoff scenarios. Employees with questions should consult state labor departments or employment attorneys to ensure they receive their full entitlements.