The IRS has asked the 6th Circuit Court of Appeals to rehear U.S. v. Quality Stores, Inc. (No. 10-1563, 6th Cir., 2012), a case that addresses the question of whether severance pay is FICA taxable.
Should the court deny the IRS’ request, or not change its decision, the IRS will likely appeal to the U.S. Supreme Court.
The appeals court ruled that an employer was entitled to a $1 million FICA refund because its severance pay plans met the statutory definition of tax-free supplemental unemployment pay (SUB pay) that applies to income tax withholding: The payments were made to employees, under a plan, because of their involuntary separation from employment, resulting directly from a reduction in force or similar condition and were included in employees’ gross income.
For its part, the IRS contends SUB pay is subject to FICA, even though it’s not wages for income tax withholding.
(For more on this case, see “Severance pay: Is it FICA taxable or not?”)
PAYROLL PRACTICE TIP: As is evident, most severance pay plans can meet this court’s definition of SUB pay. For now, however, continue to withhold FICA taxes from severance pay in general, and from SUB pay in particular, unless your payments meet the current definition of SUB pay (see IRS Pub. 15-A). If your company paid severance between 2009 and 2012, you can file a protective FICA refund claim. Claims for severance paid in 2009 are due by April 15, 2013.