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Supreme Court Finds Severance Payments Subject to FICA Withholding

    Client Alerts
  • March 28, 2014

On Tuesday, the U.S. Supreme Court unanimously held that employer severance payments are subject to payroll withholding of FICA taxes, as well as employer contributions on the amounts paid. U.S. v. Quality Stores, Inc. involved a bankrupt employer that paid discretionary severance to its employees. At the time of payment, the employer withheld FICA taxes from these payments and made matching employer contributions. Later during bankruptcy proceedings, the employer petitioned the IRS for a refund on behalf of itself and its former employees, contending that the severance payments were not subject to FICA taxation. The Sixth Circuit agreed, leading to the Supreme Court’s consideration of the issue.


The Court concluded that FICA’s language and legislative history both support the view that severance payments are taxable wages. The employer contended that another provision of the Internal Revenue Code indicated that severance payments were to be treated as other than wages. The Supreme Court stated that this provision only applies to a narrow problem involving income tax withholding, and that it does not mean that for purposes of FICA withholdings, severance payments are anything other than wages.

This position is supported by language in FICA that applies the definition of wages to the entire employment relationship, and not just payment for services performed. The Court noted that Congress expressed its desire not to treat income tax and FICA contributions differently for purposes of payroll withholding. This decision closes the door on attempts by employers and employees to treat severance payments differently than wages for payroll tax purposes.