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US Supreme Court Rules Severance Payments Subject to FICA

Saul Brenner, CPA, J.D., LL.M. 05.29.2014 | eVisor

In an 8-0 decision, the US Supreme Court recently ruled that severance payments to terminated employees are taxable wages for FICA tax payment purposes1 — overturning an earlier decision by the Sixth Circuit.2

Upon terminating thousands of employees after entering into bankruptcy in 2001, Quality Stores treated the severance payments as wages. Income tax and the employee portion of FICA were withheld and Quality paid its FICA tax liability.  Later, Quality sought refunds for the FICA tax the company had paid, but the IRS took no action.  Quality then filed and won a claim in Bankruptcy Court.  On appeal, the Sixth Circuit noted that under Internal Revenue Code Sec. 3402(o) the definition of wages for income tax withholding purposes does not extend to severance payments. By carrying that a step further, the Court concluded that severance payments were also not subject to FICA withholding.

In overturning the lower courts, the Supreme Court noted that wages are defined broadly to include all remunerations paid for employment and that employment is any service an employee undertakes for an employer. The Supreme Court also noted that services are not limited to work actually performed. Under these parameters, severance pay constituted wages subject to FICA withholding.

1 United States v. Quality Stores et. al,  Cite as 113 AFTR 2d 2014-1326 (134 S. Ct. 1395), Code Sec(s) 3111; 3121; 3402, (S Ct), 03/25/14

2 Quality Stores, Inc., 693 F.3d 605 (6th Cir. 2012), aff’g  424 B.R. 237 (W.D. Mich. 2010), aff’g  383 B.R. 67 (Bankr. W.D. Mich. 2008)).

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