At first glance, Federal income tax is fairly simple. Tax is due on all wages and the term wages includes more than just salary, but the full spectrum of compensation. When an employee is offered severance pay, this is treated the same ordinary wages and subject to income tax. On that point, there isn’t much debate.
There is disagreement, however, concerning severance pay and another federal tax, FICA. FICA stands for Federal Insurance Contributions Act. It’s a tax that helps finance Social Security and Medicare. Both employers and employees have FICA contributions. Typically the employee portion is withheld from their paychecks, same as income tax.
But on whether severance pay is subject to FICA tax, opinions differ. The IRS has held that severance pay is to be treated like any other wages and thus subject to FICA. In 2008, a federal appeals court upheld the IRS position in a case dealing with the railroad company CSX Corp. In 2012, however, the 6th U.S. Circuit Court of Appeals ruled that Quality Stores, Inc and its former employees, could claim a refund from the IRS for FICA tax paid on severance payments. It is that Quality Stores case which is now brought before the Supreme Court.
The Supreme Court’s current session began this month and runs through June.
For more on FICA, other federal taxes, or other tax law matters, please contact Horowitz Law Offices at 312-787-5533 or firstname.lastname@example.org