Severance pay: Is it FICA taxable or not?

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in Office Management,Payroll Management

A federal appeals court has ruled that a bankrupt company’s severance payments qualified as FICA-free supplemental unemployment benefits—also known as SUB pay. Therefore, the court concluded, the company’s $1 million FICA refund claim was proper.

Warning: This severance pay plan is typical of most severance pay plans, which means that the IRS is facing potentially hefty refund claims submitted by other employers. As a result, it’s unlikely that the IRS will take this decision lying down. (U.S. v. Quality Stores, Inc., No. 10-1563, 6th Cir., 2012)

SUB pay

SUB pay isn’t wages, but it is taxable. In the 1950s, the IRS issued rulings in which it concluded that SUB pay that was tied to employees’ receiving unemployment benefits wasn’t payroll-taxable. Even so, tax code Section 3402(o) requires employers to withhold income taxes from SUB pay, as if it were wages. SUB pay isn’t FICA taxable if, among other requirements, it’s paid o...(register to read more)

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