Supreme Court rules severance pay subject to FICA tax


GavelThe Supreme Court has ruled in United States v. Quality Stores, Inc. (No. 12-1408), that severance pay is subject to taxes under the Federal Insurance Contributions Act (FICA). The 8-0 ruling, issued on March 25, shuts down a potential $1 billion refund opportunity for employers who made severance payments in recent years.


FICA generally subjects all wages (with certain limited exclusions) to matching employer and employee contributions for Social Security and Medicare taxes. The IRS has long argued that severance payments made at separation from service are wages for FICA tax purposes, and the Federal Circuit agreed with the IRS in CSX Corp. v. United States (518 F.3d 1328) in 2008. But the Sixth Circuit set up a circuit split by ruling in Quality Stores in 2012 that supplemental unemployment compensation (SUB) payments as defined under Section 3402(o) are not subject to FICA. Section 3402(o) defines SUB payments as payments made because of an employee’s involuntary separation from employment resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions.   


Section 3402(o) states that SUB payments should be treated “as if they were wages” for income tax withholding purposes. The taxpayer in Quality Stores had argued that this rule implies that SUB payments are not actually wages and that there is no corresponding rule to treat them as if they were wages for FICA tax purposes.


The Supreme Court rejected that argument based on the context in which Section 3402(o) was enacted, and said that the severance payments at issue were clearly covered under FICA’s broad definition of wages, which includes “all remuneration for employment.”


The Supreme Court’s decision is final and must be respected by all U.S. courts. This ends a potential refund opportunity that the IRS had said could total over $1 billion. Many employers had made protective claims to await the outcome of the litigation. Taxpayers can now abandon all claims because no refunds will be available. No action is required by employers to abandon claims. Employers should continue to withhold and remit FICA tax on severance payments that are considered remuneration for services. However, employers should be aware that severance payments tied to the receipt of state unemployment benefits continue to be exempt from FICA under Rev. Rul. 90-72 and several earlier rulings. The Supreme Court’s decision does not affect this exemption.

Adam Lambert

T 212.542.9639



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