Supreme Court Decides Severance Pay is Subject to FICA Tax

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In a unanimous decision (with Justice Kagan recused), the Supreme Court, reversing the Sixth Circuit Court of Appeals, has held that severance payments that were made to involuntarily terminated employees and that weren’t tied to the receipt of State unemployment insurance, are subject to tax under the Federal Insurance Contributions Act (FICA). The Court easily concluded that the severance payments at issue fell within Code Sec. 3121’s broad definition of “wages” for FICA tax purposes and rejected the taxpayer’s argument that the payments’ tax treatment was altered by a special withholding provision in Code Sec. 3402.

The Supreme Court settled the split Court rulings on whether severance payments should or should not be included as wages for FICA tax purposes. See the prior blog post Filing Deadline: 2010 FICA Protective Refund Claims for Severance Pay for additional information.

In the case in front of the court, U.S. v. Quality Stores, Inc., et al, Quality Stores sought a refund of approximately $1 million. According to the government’s petition, the total dollar amount at stake (i.e., including other pending refund claims and litigation) was over $1 billion, which news outlets and industry insiders speculated was conservative.

A sigh of relief was heard from the federal government.

By Melinda Nelson, CPA