Supreme Court Confirms FICA Taxes Must be Withheld from Severance Payments

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Finding severance payments to be a form of “remuneration for employment,” the United States Supreme Court in United States v. Quality Stores, Inc. held that such payments are taxable wages – and thus subject to withholding – under the Federal Insurance Contributions Act (FICA).

Quality Stores, an agricultural retailer, terminated thousands of employees before and during bankruptcy proceedings in 2001. The terminated employees received severance payments, from which Quality Stores deducted FICA taxes (which are used to fund Social Security and Medicare). Subsequently, Quality Stores sought refunds of the withheld FICA taxes on behalf of itself and 1,850 former employees, in the amount of roughly $1 million. The Bankruptcy Court granted Quality Stores’ request for the refund, and the District Court and Sixth Circuit Court of Appeals affirmed the decision, finding that the severance payments were not “wages” under FICA. The United States appealed.

The Supreme Court first determined that severance payments fell within FICA’s definition of wages because they are “remuneration for employment.” The Court noted that “common sense” dictates that when employees receive severance, it is “for employment,” and that, when made, they are for the employee’s services to the employer. The Court also affirmed what is already well established: that severance payments fall within the broad definition of wages subject to income tax withholding under the Internal Revenue Code.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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