This Month Only! >> $20 off and a FREE SHRM tote with your membership and code TOTE2018!
Sign up for free email newsletters and get more SHRM content delivered to your inbox.
Is your employee handbook keeping up with the changing world of work? With SHRM's Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Build competencies, establish credibility and advance your career—while earning PDCs—at SHRM Seminars in 12 cities across the U.S. this spring.
#SHRM18 will expand your perspective – on your organization, on your career, and on the way you approach HR. Join us in Chicago June 17-20, 2018
Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.
The U.S. Supreme Court agreed on October 1, 2013, to consider whether severance payments made to employees who are terminated are subject to Social Security and Medicare payroll (FICA) taxes.
United States v. Quality Stores, Inc., (6th Circuit, Sept. 7, 2012), the U.S. Court of Appeals for the Sixth Circuit affirmed a district court ruling that severance payments
were not wages subject to FICA taxes. The Internal Revenue Service requested review.
By way of background, Quality Stores had made severance payments to terminating employees and all payroll taxes, including FICA, were withheld from such payments. As FICA taxes are matched by the employer, both the employer and the employee paid this tax. After payment, the employer filed for a tax refund on the basis that the severance plan payments were supplemental unemployment benefits (SUB), and as such, were not wages for FICA purposes. Both the district and federal appellate courts, however, found the severance to be SUB payments, reasoning that such payments were not remuneration for services under FICA but rather payments related to the “elimination of employment.” As such, these payments were not subject to FICA although otherwise subject to income taxes. The IRS argued that the Quality Stores severance payments were not exempt from FICA taxes.
Quality Stores for review, the Supreme Court will have the opportunity to reconcile a conflict within the circuits, as the Federal Circuit in
CSX Corp. v. United States, (Federal Circuit, 2008), has taken the contrary position.
What Does This Mean for Employers?
Given the current split in the circuits, Supreme Court review provides an opportunity not only to settle this issue, but also affords certain severance plan sponsors and severance recipients an opportunity to timely file for and receive refunds on FICA taxes paid. Except for filing extensions already granted by the IRS, the earliest current open year for filing a refund claim is for tax year 2010. Pending the resolution of this case, the IRS had indicated that it would grant extensions to file suit to collect on pending refund claims. It is estimated that if the
Quality Stores decision is affirmed, it could result in multiple billions of dollars of FICA refunds. At this point, employers that have paid out severance as FICA taxable wages during 2010 or later should consider reviewing those plans and filing protective refund claims.
Pending the Supreme Court decision, employers should continue to withhold and pay FICA taxes on severance payments otherwise taxable for federal income tax purposes.
GJ Stillson MacDonnell is a shareholder and chair of the employment taxes practice group at law firm Littler Mendelson P.C., in the firm's San Francisco office. This article first appeared in the Littler Workplace Policy Institute's
DC Employment Law Update.
© 2013 Littler Mendelson. Republished with permission. All rights reserved.
Related SHRM Articles:
Supreme Court Faces Variety of Employment Issues in 2013-14 Term.
SHRM Online Legal Issues, October 2013
Severance Payments: To Tax or Not to Tax?,
SHRM Online Legal Issues, June 2013
IRS May Owe Employers Millions in FICA Refunds,
SHRM Online Legal Issues, October 2012
Be Cautious of Ruling that Severance Pay Isn't Subject to FICA,
SHRM Online Compensation, April 2010
SHRM Online Compensation Page
Salary Survey Directory
Compensation Data Center
Metro Economic Outlook reports
Compensation & Benefits e-NewsletterTo subscribe to SHRM's weekly Compensation & Benefits e-newsletter, click the link above. To see all of the SHRM e-newsletters, click below.
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Please sign in as a SHRM member before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
SHRM Member Discounts Program
SHRM’s HR Vendor Directory contains over 10,000 companies