Posted on March 26, 2014

Severance Pay is Subject to FICA Taxes, Supreme Court Decides

In a reversal of a lower court decision on March 25, 2014, the Supreme Court ruled in the United States v. Quality Stores Inc. that severance pay made to involuntarily terminated workers is subject to Federal Insurance Contribution Act (FICA) taxes.

In the case, Quality Stores claimed that the severance payments were not subject to FICA taxes because they were “neither make-whole compensation nor wages for services performed.” The government claimed the payments were FICA-taxable because they were compensating employees for services. More than $1 billion in contested tax liabilities were at stake in this case.

The takeaway for US companies? While this case was making its way through the courts, many organizations filed protective claims with the IRS in hopes that severance pay would be ruled as not taxable and they would receive a tax credit for FICA taxes already paid. Now that the Supreme Court has made this decision, any protective claim that was filed will not be valid.

Read the Supreme Court’s decision here.

Source: Bloomberg Bureau of National Affairs