Are supplemental unemployment benefits paid to laid-off employees considered “wages” under the Federal Insurance Contributions Act (FICA), and therefore taxable as income?
In 2001, Quality Stores made severance payments to employees who were involuntarily terminated after Quality Stores filed for Chapter 11 bankruptcy. Quality Stores later argued that the payments should not have been taxed as wages under the Federal Insurance Contributions Act (FICA). When the IRS did not respond to Quality Stores’ claim seeking a $1 million refund in FICA taxes, Quality Stores commenced an adversary action in bankruptcy court. The bankruptcy court ruled for Quality Stores, concluding that the severance payments were non-taxable supplemental unemployment benefits (SUBs). The district court and Sixth Circuit affirmed. The Supreme Court will determine whether severance payments to involuntarily terminated employees are taxable wages under FICA. The Court will resolve a circuit split between the Sixth and Federal Circuits in a decision that will affect all employers who provide severance pay. At stake are billions of dollars in FICA tax refunds to employers and their former employees.
Whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act (“FICA”), 26 U.S.C. 3101 et seq.
- Laura Saunders, Can Severance Pay Be Taxed?, The Wall Street Journal, (Nov. 8, 2013).
- Robert Sherry, Severance Payment Tax Treatment to Get Supreme Court Review, Thomson Reuters, (Oct. 9, 2013).
- Global Tax Alert, US Supreme Court Agrees to Hear Quality Stores Case on Whether Severance is Subject to FICA, Ernst & Young, (Oct. 2, 2013).