Wednesday, April 30, 2014

Severance pay subject to FICA

Q Corporation discharged employees and made severance payments that it called supplemental unemployment compensation, even though they were paid in a lump sum and not in connection with the UI benefits. Initially it treated the payments as wages, including them on W-2s, and paid its share of the payroll taxes.

Subsequently, it concluded that this treatment was improper and filed a claim with the IRS for a refund of over $1 million in FICA taxes.

When the IRS did not respond to the refund request, Q Corporation filed a suit for a refund. When Q was able to prevail in the Sixth Circuit Court of Appeals, the IRS appealed to the Supreme Court.

Held: For the IRS.The Supreme Court said that if Congress had wanted lump-sum severance pay to be excluded from the definition of wages, it would have specifically excluded it. Accordingly, lump-sum severance pay is subject to FICA and FITW. [United States v. Quality Stores Inc., U.S. Supreme Court, No. 12-1408]

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