Severance Payments are Subject to FICA

The US Supreme Court, in US v. Quality Stores, Inc. (March 25, 2014), unanimously held that severance payments are taxable wages for purposes of the Federal Insurance Contributions Act (FICA) (12-1408, 2014 WL 1168968 (U.S. March 25, 2014).

Reversing the Sixth Circuit’s decision, the Supreme Court found that employer’s severance payments were considered taxable wages under FICA’s definition of ‘wages.’ The Court’s rationale was based on the following:

• Congress defined ‘wages’ broadly under FICA.
• Severance payments that are made to terminated employees are ‘remuneration for employment’ under this definition.

Any employer that has not withheld FICA in connection with severance payments should (i) consider whether and how to correct their returns for prior years ,and (ii) make necessary changes to policies to withhold FICA on severance payments in the future.