Because severance pay is not government mandated by federal or state laws, rules regulating the pay are determined by each individual employer. It is the additional payment form a company aside from the final payment of all earned wages that is required by federal law. Severance pay rules for employees are usually specified in their contract before beginning work. It is sometimes negotiated after termination. Severance pay can be in the form of insurance, a bonus lump sum, electronics or stocks. The IRS taxes severance payments as part of one's income, or at a flat rate of 25%.