October 10, 2013

Supreme Court to Consider Whether Severance Payments are Subject to FICA Taxes

Contributor Paul Graney, Partner, Tax & Business
Diane Giordano, Partner, Tax & Business
Ronald Finkelstein, Partner, Tax & Business
Ali Hirji, Supervisor, Tax & Business

Supreme Court to Consider Whether Severance Payments are Subject to FICA Taxes Tax & Business

In September 2012, the Court of Appeals upheld in the case of United States v. Quality Stores, Inc. that severance payments are not subject to FICA taxes. As a result, both Quality Stores, Inc. and its former employees could claim refunds from the IRS by filing protective claims. On October 1st, 2013, the U.S. Supreme Court granted certiorari to the Federal government in its challenge of the Sixth Circuit’s decision.

The treatment of severance payments, also called “supplemental unemployment compensation” or “SUB”, for FICA purposes has often been disputed in the past. In general, both the company and the terminated employees have to pay FICA taxes related to severance payments. However, the Sixth Circuit affirmed a lower district court’s decision that these payments do not fall within the tax law’s definition of employee wages because they are not compensation for work performed. Therefore, they should not be subjected to FICA. Prior to this decision, the U.S. Court of Appeals for the Federal Circuit held that severance payments are subject to FICA in the case of CSX Corporation v. United States.

With the Sixth Circuit and the Federal Circuit Court of Appeals at a disagreement, the U.S. Supreme Court will make the final decision on the tax treatment of severance payments. A favorable decision would allow businesses nationwide to obtain FICA tax refunds on supplemental unemployment benefits payments. For now, companies will have to continue to pay and withhold FICA tax on employee severance payments. Many taxpayers have already filed protection claims for refunds from the IRS, which will be pending on this issue. The filing of such claims is subject to the three year statute of limitations.

Your tax team at Marcum LLP will keep you up to date on the status of this case. Should you have any questions regarding potential refunds in this matter, please contact your Marcum Tax professional.

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