The 6th Circuit Court of Appeals has denied the IRS’ request to rehear its decision in U.S. v. Quality Stores, Inc. (No. 10-1563, 6th Cir., 2012). Having run the gamut at the appellate level, it’s likely that the IRS will appeal to the U.S. Supreme Court. A petition to the Supreme Court is due April 4.
The 6th Circuit 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 for 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 still contends SUB pay is subject to FICA, even though it’s not wages for income tax withholding.
PAYROLL PRACTICE TIP: The court’s definition of SUB pay is so broad that most severance plans can meet it. For now, however, continue to withhold FICA taxes from severance pay in general, and from SUB pay in particular, unless your plan meets the current definition of SUB pay (see IRS Pub. 15-A). If you 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).
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