Yesterday, the Supreme Court ruled on the case of United States v. Quality Stores. Reversing the decision of the lower courts, the Supreme Court found that severance pay are taxable wages for FICA purposes. The justices ruled 8-0, with Justice Kagan recusing herself from the case.
The case arose during the bankruptcy proceedings of Quality Stores, Inc. and its affiliates. As part of the Chapter 11 proceedings, Quality Stores made severance payments to employees who were involuntarily terminated. Quality Stores withheld taxes as required under the Federal Insurance Contributions Act (FICA). These taxes are collected to fund Medicare and Social Security. Later, Quality Stores sought a refund of those taxes, believing FICA did not actually apply to severance payments. The IRS did not allow or deny the refund, so Quality Stores brought action in the Bankruptcy Court, which ruled in Quality Stores’s favor. The District Court and the Sixth Circuit Court of Appeals upheld that decision. The Supreme Court reversed it.
The decision is uncomplicated. FICA defines wages as “all remuneration for employment” and the Supreme Court holds that severance payments plainly fit that standard. They are paid in consideration for employment, thus they are subject to the tax. The opinion further points out that within the Act’s lengthy list of exceptions, severance payments made because of retirement for disability are specifically exempted. There would be no need for such a provision unless severance payments were generally subject to tax.
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