United States

Supreme Court rules severance payments are subject to FICA tax


On March 25, 2014, the U.S. Supreme Court ruled that supplemental unemployment benefits (severance) represent wages under section 3101(a) and, as a result, are subject to FICA tax. The decision in United States v. Quality Stores Inc., et al., No. 12-1408, reversed the 2012 Sixth Circuit Court of Appeals ruling by unanimous opinion of the justices (Justice Kagan not participating). The Court’s opinion references the plain meaning of the statute, citing the broad section 3121(a) definition of FICA wages as all remuneration for employment.

The taxpayer, Quality Stores, unsuccessfully argued that severance payments fall outside the definition of wages for FICA tax purposes. One of Quality Store’s primary positions pointed to an income tax withholding statute, section 3402(o), which states that severance payments shall be treated “as if” they were wages. The theory was that this statute was needed to cause severance to be subject to income tax withholding, as severance otherwise would not have been considered wages. The Court rejected the argument, citing the historic purpose of section 3402(o), which was to combat unintended income tax consequences for recipients receiving supplemental unemployment benefits back in the 1950’s. In addition, “Congress intended… to coordinate the income tax withholding system with FICA.” Rowan Cos. vs. United States, 452 U.S. 247 (1981).

The decision is not only a defeat for Quality Stores, but also for taxpayers who sought potential FICA refunds attributable to severance pay by filing protective claims with the IRS. Such protective claims will be denied. Taxpayers should continue to withhold and pay FICA tax on severance payments, as they are wages as defined under section 3121(a).   

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