April 10, 2014. Employers are generally to characterize severance payments as taxable wages after the Supreme Court issued a decision on March 25, 2014. In United States v. Quality Stores, Inc., the Supreme Court unanimously held that employers should withhold FICA, Social Security, and Medicare taxes from severance payments made to dismissed employees. The decision resolved a circuit split on the issue. Certain exemptions are allowed by the federal law, such as severance for retirement for disability. In addition, the Supreme Court noted that exemptions arising under IRS Rulings for structured severance payments tied to state unemployment benefits are still in effect.
The case involved a company which laid off many employees and then filed for bankruptcy. The company originally deducted FICA, Social Security and Medicare taxes from the severance payments it made to dismissed employees. After it filed for bankruptcy, however, the company filed for a refund of FICA taxes and took the issue to the bankruptcy court. The Bankruptcy Court sided with the company. The Supreme Court took the case and decided in favor of the IRS’s position. Employers should generally deduct these federal taxes from severance payments when cutting checks and consult legal advice if an exemption may apply.
For more information about taxes and terminated employees or employment law, contact the Goosmann Law Firm at info@goosmannlaw.com or call 712-226-4000.
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