Articles

Severance Pay is Subject to FICA Taxes by Joanie Stein


Posted on June 17, 2014 by Joanie Stein

In March 2014, the U.S. Supreme Court ruled that severance payments made to terminated employees are considered taxable wages under the Federal Insurance Contributions Act (FICA).

At stake before the Court was approximately $1 million in refunds that Quality Stores sought for FICA taxes it paid on severance payments made to thousands of terminated employees. Quality Stores contended that severance payments should have been considered supplemental compensation benefits (SUB) and consequently exempt from FICA tax.

In its opinion, the Court looked to Congress’s broad definition of wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” It further ruled that he term “employment” extends to “any service, of whatever nature, performed … by an employee for the person employing him.”

Under this definition, the Court ruled that severance payments made to terminated employees are “remuneration for employment.” The Court further explained that severance payments are made to employees only, and not to individuals who have not worked for the employer. As a result, the Court ruled, severance payments are subject to Social Security and Medicare taxes.

About the Author: Joanie B. Stein, CPA, is a senior manager in the Tax Services practice with Berkowitz Pollack Brant. For more information, call 305-379-7000 or email info@bpbcpa.com.