In 1894, David E. Severance applied for a post office for a community of approximately 50 families to be named Tailholt. However, because Mr. Severance put in for the post office it was erroneously named Severance and just stayed that way. Mail for Severance was carried to and from Eaton, then later from Windsor, by horse and buggy.
A promotion began in the early 1900s to persuade farmers to raise sugar beets so a sugar factory would be built in neighboring Windsor. The necessary acreage was pledged and the Windsor factory was built in 1903, becoming the Great Western Sugar Company in 1905. Then Severance became a sugar beet receiving station and dump on the Great Western Railway, operating until 1985. Severance was founded by Bruce Eaton, the son of Governor Benjamin Eaton in 1906 and by 1920 the town had enough residents to incorporate, with 40 votes for and 0 against.