Today, we discuss taxes – specifically, the taxation of severance payments. It has long been recognized that severance payments are “income” to an employee, and that employers must withhold federal income taxes from the payments. Earlier this year, the Supreme Court made clear that severance payments also are “wages” subject to FICA taxes, and that an employer must withhold FICA taxes as well. The case, United States v. Quality Stores, 134 S. Ct. 1395 (2014), resolved a split among two federal appellate courts that had led many employers to seek a refund of the employer share of FICA taxes paid to the IRS on severance payments.
FICA is the federal payroll tax on wages that funds Social Security and Medicare. The tax is paid by both employers and employees. Each pays 7.65% on the first $106,800 of the employee’s annual wages and then 1.45% on amounts exceeding that threshold. Employees never see their share of the tax – employers are required to withhold and pay the employee’s share to the IRS.
In the 2008 case of CSX Corporation v. United States, 518 F.3d 1328, the Federal Circuit agreed with the IRS that a form of severance called supplemental unemployment compensation benefits (or SUB payments) falls within the broad definition of “wages” subject to FICA taxes. But several years later in Quality Stores, the Sixth Circuit reached the opposite conclusion, holding that SUB payments are not wages subject to FICA taxes. 693 F.3d 605 (2012). The court reasoned that because section 3402(o)(1) of the Internal Revenue Code states that SUB payments shall be treated “as if” they are wages for income-tax withholding, they are not in fact wages.
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