On Mar. 25, the U.S. Supreme Court settled a long-standing issue about the taxation of severance pay. In a unanimous decision, the court held that severance payments made to involuntarily terminated employees that were not tied to the receipt of state unemployment insurance benefits are subject to Federal Insurance Contributions Act (FICA) taxes.
In United States v. Quality Stores, Inc. et al, No. 12-1408 (2014), the Court determined that the severance payments in this case fell within the law’s broad definition of “wages” for Social Security and Medicare tax withholding. The decision reversed a Sixth Circuit Court of Appeals decision that held supplemental unemployment plan (SUB) payments paid to former employees pursuant to an involuntary reduction in force were not taxable “wages” for purposes of FICA taxes. As suggested in our E-Alert last April, thousands of employers filed protective refund claims to preserve their right to a refund and extend the statute of limitations.
Based on the Supreme Court’s decision, Employers to Pay Taxes on Severance Pay, employers should continue treating traditional severance pay as wages subject to FICA tax. Likewise, the 2,400 employers who filed, or were planning to file, protective refund claims with the Internal Revenue Service (IRS) should review their claims in light of this decision. Given the resolution of this case, it is anticipated that the IRS will deny pending and future refund claims where the severance payments were not linked to receipt of state unemployment benefits, the payments were varied based on job seniority and time served, and were made to employees involuntarily terminated from employment.
If you have any questions about the implications of Supreme Court’s decision or any other tax related issues, please contact Dannae Delano at firstname.lastname@example.org or Jamie Westbrook at email@example.com.
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