Supreme Court holds severance payments are taxable wages under FICA

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Posted on 04/15/2014 at 09:16 AM by Joan Fletcher

In United States v. Quality Stores Inc., 134 S. Ct. 1395 (2014), the U.S. Supreme Court recently considered whether severance payments, made to employees terminated against their will, are taxable wages under the Federal Insurance Contributions Act (FICA). The 6th Circuit Court of Appeals - relying on a provision of the Internal Revenue Code governing income tax withholding - held they were not. The Supreme Court determined that the 6th Circuit's conclusion was incorrect. Quality Stores made the severance payments, which varied depending on seniority and time served, as part of a Chapter 11 bankruptcy. The company argued that a provision of the Internal Revenue Code instructing that any supplemental unemployment compensation benefit paid to an individual 'shall be treated as if  it were a payment of wages by an employer . . .' (emphasis added) indirectly means that the definition of wages for income-tax withholding does not cover severance payments. The Supreme Court disagreed, noting that since FICA defines 'wages' as 'all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash, severance payments are within FICA's broad definition of wages. The opinion provides historical background of FICA's definition of wages, bolstering the Court's conclusion. The Quality Stores decision adopted the majority view of the Circuit Courts, including the 8th Circuit, on the issue. The decision did not address whether payments made by an employer to an employee whose employment is terminated, regardless of the reason, in consideration of a release of potential claims is subject to FICA. Iowa Workforce Development has historically held that such payments are not severance pay. This is an important distinction because a former employee may not receive unemployment compensation in weeks during which wages are received. You can find more information on taxation of terminations, settlements and judgments on our Iowa Tax Planning and Estate Blog.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Joan Fletcher


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