The U.S. Supreme Court has agreed to hear a case that will determine whether money paid to terminated employees as part of a severance package should be subject to Social Security and Medicare taxes.
Last year, the 6th Circuit Court of Appeals upheld a lower court’s ruling that severance payments were not wages for FICA tax purposes (United States v. Quality Stores, Inc., No. 10-1563, 6th Cir., 2012). In that case, Quality Stores successfully argued that severance wasn’t subject to FICA taxes because the payments were supplemental unemployment benefits, also known as SUB pay.
The decision set up a split between circuit courts. In 2008, the Federal Circuit Court of Appeals ruled that severance was subject to FICA taxes (CSX Corp. v. United States, 518 F. 3d 1328, Fed. Cir., 2008).
To resolve the split, the IRS requested the appeal to the High Court. Oral arguments have not yet been scheduled.
Employers should watch this case. A decision in Quality Stores’ favor could mean large tax refunds for both employers and former employees. In the meantime, continue to withhold FICA taxes from severance payments.