Supreme Court Rules Severance Pay Can Be Taxed Under FICA

The Supreme Court recently ruled that lump sum severance payments made to laid-off employees can be subject to FICA taxes. This overrules a decision by the Sixth Circuit Court, which ruled that such payments did not have to be taxed.

In the case of U.S. v. Quality Stores, the store claimed $1 million in FICA tax refunds when it laid off thousands of employees after entering bankruptcy in 2001. In the fall of 2012, the Sixth Circuit ruled that the severance was not subject to FICA taxes.

Unlike the Quality Stores case, in 2008, the Court of Appeals for the Federal Circuit overturned a lower court’s ruling in CSX Corp. v. U.S. The lower court allowed the company to claim refunds after employers and former employees paid the FICA tax to the Internal Revenue Service.

SCOTUS took up the Quality Stores case to clear up any discrepancies between this case and the CSX case. The Court ruled 8-0 that it was clear that severance pay is considered take-home pay and, therefore, subject to taxation under FICA. The Court also ruled that neither the companies nor the discharged workers are eligible for refunds.

The Court added that employers could get around the tax if the payments were structured in a special way in which employers fund a trust and employees get weekly payments tied to the receipt of state unemployment benefits. However, companies do not take advantage of this because it is considered burdensome and time-consuming.

If you have recently been terminated and feel your severance payments may be considered taxable, please consult an employment law attorney immediately.

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