In an 8-0 decision[1] issued March 25, 2014 in United States v. Quality Stores, Inc., the Supreme Court held that severance payments made to employees who are involuntarily terminated are taxable wages for the purposes of withholding Federal Insurance Contributions Act (“FICA”) taxes, i.e., Social Security and Medicare.  This decision resolves a circuit split created when the Sixth Circuit ruled in 2012 that these kinds of severance payments did not constitute “wages” under FICA[2] while the Third, Eighth and Federal Circuits had all previously held that at least some severance payments were “wages” subject to FICA taxes.[3]

In the wake of this decision, employers should, under most circumstances, treat severance payments made to involuntarily terminated employees as taxable wages subject to FICA taxes. There are exceptions to the general rule, however, and it is important for employers to seek competent legal counsel to assist in determining the tax status of a specific severance program.


Continue Reading US v. Quality Stores, Inc.: Supreme Court Finds Severance Payments Taxable Wages Under FICA

On Tuesday, March 25, 2014, the U.S. Supreme Court ruled in favor of the Internal Revenue Service in a dispute over the payroll tax treatment of certain types of severance compensation.  The justices, in an 8-0 vote, overturned the Sixth Circuit’s opinion in Quality Stores, Inc., which had held that severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (so–called “supplemental unemployment compensation benefits”) is not subject to tax under the Federal Insurance Contribution Act (FICA).
Continue Reading Severance Payments are Taxable under FICA