Are Severance Payments Subject to FICA Taxes?

The Supreme Court Sides with the IRS

Maria M. Pirrone, JD, LLM, CPA

In the current economic climate, bankruptcies and loss of employment are an unfortunate reality. When affected employees receive severance payments, these proceeds constitute taxable income. The issue of withholding Federal insurance Contributions Act (FICA) taxes from these payments has been the source of much litigation. On March 25, 2014, the U.S. Supreme Court unanimously decided that severance payments made to employees who are involuntarily terminated are subject to Social Security and Medicare taxes [U.S. v. Quality Stores, S.Ct. 12-1408 (March 25, 2014)]. The decision saved the IRS from refunding more than tens of millions of dollars to employers and employees, and it resolved a split in the federal circuits. As a result of this decision, employers should treat severance payments to involuntarily terminated employees as taxable wages subject to FICA taxes.