U.S. Supreme Court - Severance payments are wages subject to FICA 

March 25: The U.S. Supreme Court today held (8 to 0) that severance payments made to employees who are terminated against their will are taxable wages and are subject to certain withholding taxes, including FICA taxes. United States v. Quality Stores, Inc., 12-1408 (S. Ct. March 25, 2014)

Read the Court’s opinion [PDF 133 KB]


Quality Stores made severance payments to employees who were involuntar¬ily terminated as part of a Chapter 11 bankruptcy. The severance payments—made pursuant to plans that did not tie pay¬ments to the receipt of state unemployment insurance—varied based on job seniority and time served. Quality Stores paid and withheld taxes required under the Federal Insurance Contributions Act (FICA).

Subsequently, Quality Stores took the position that the severance pay¬ments were not taxable as wages under FICA. Quality Stores filed for a refund on behalf of itself and about 1,850 former em¬ployees. The IRS denied the refund claim, and Quality Stores initiated proceedings in the bank¬ruptcy court, which granted summary judgment in its favor. The federal district court and Sixth Circuit affirmed, concluding that severance payments are not wages under FICA.

The Sixth Circuit held that the payments were not wages subject to FICA tax, and in reaching this conclusion, relied not on FICA’s defini¬tion of wages but on section 3402(o)—a provision governing income tax withholding.

Today, the Supreme Court held that the severance payments were taxable wages for FICA purposes and found the Sixth Circuit’s reliance on the definition of wages in section 3402(o) to be incorrect.

The Court noted that the IRS (in Rev. Rul. 90-72) still provides that severance payments tied to the receipt of state unemployment benefits are exempt from, not only income tax withholding, but also from FICA taxation.

KPMG observation

Many taxpayers filed protective FICA tax refund claims pending the outcome of the Quality Stores case. In light of today’s Supreme Court’s decision, further action with the IRS with regard to such claims generally would be unnecessary.

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