Supreme Court to consider FICA tax issue on severance payments 

October 1:  The U.S. Supreme Court today granted certiorari from the Sixth Circuit’s decision in Quality Stores, a case holding that certain severance payments are not wages for purposes of FICA tax withholding.

Conflict between the Circuits

At issue in United States v. Quality Stores, Inc. was whether severance payments to terminated employees on company cessation were exempt from FICA tax.


The Sixth Circuit addressed this issue and affirmed the federal district court’s holding that the severance payments made by Quality Stores qualified as supplemental unemployment compensation benefits (SUB payments) and, further, did not constitute wages subject to FICA tax (although the payments were taxable income to the employee).


SUB payments are defined as “amounts . . . paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment . . . resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions . . . .”


The decision of the Sixth Circuit in Quality Stores conflicts with the Federal Circuit’s decision in CSX Corp. v. United States. Unlike the Sixth Circuit, the Federal Circuit held that involuntary severance payments were “wages” for FICA tax purposes.

KPMG observation

With the U.S. Supreme Court’s decision to hear the case (and a decision not anticipated until June 2014), taxpayers potentially eligible for FICA tax refunds for the 2010 calendar year need to consider filing protective refund claims by April 15, 2014 (note that the statute of limitations period for filing employment tax refund claims for all 2010 quarterly tax periods terminates on April 15, 2014).


Taxpayers that previously filed FICA tax refund claims (including protective claims) and received an IRS notice of disallowance within the last two years need to consider requesting from the IRS an extension of time to bring suit in challenge to the claim disallowance (generally using Form 907). In general, there is a two-year period for filing suit in response to an IRS notice of disallowance. Taxpayers must have the right to bring suit on a disallowed claim in order to obtain a FICA tax refund if the Supreme Court should rule in the taxpayer’s favor.


Read TaxNewsFlash-United States: FICA on severance payments - Government files petition for certiorari with Supreme Court




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