Severance Pay As Wages: Business As Usual


EmpBlog-3.28.2014-FICA-iStock-PAID-RESIZEDConfirming what most employers have long assumed to be true, this week the U.S. Supreme Court held that severance payments made to terminated employees are “wages” subject to the Federal Insurance Contributions Act (FICA) tax withholding requirements. Specifically, United States v. Quality Stores, Inc. was a bankruptcy case which involved an attempt by Quality Stores to claw back taxes paid in connection with severance to workers. The issue on appeal was whether supplemental unemployment compensation benefits, which was how both the taxing authorities and Quality Stores characterized the severance payments, were not wages for income tax withholding requirement purposes. The Court held that the relevant statutory provision (26 U.S.C. § 3402(o)) did not make this distinction, nor was there other relevant authority that had any impact on the definition of wages under FICA, which broadly defines wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” 26 U.S.C. § 3121(a). Accordingly, the severance payments constituted remuneration for employment and were subject to withholding requirements.

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