22 Jun Are Severance Payments Subject to FICA?
According to the recent decision in United States v. Quality Stores,
Inc., No. 1:09-cv-44 (W.D. Mich. Feb. 23, 2010) (“Quality Stores”),
severance payments resulting from an involuntary termination are not
subject to taxation under the Federal Insurance Contributions Act
(“FICA”) because such payments do not constitute “wages.” Prior to
Quality Stores, it was generally accepted that severance payments are
taxed like any other bonuses.
While it is generally accepted that severance payments are a form of
“wages” subject to FICA, it is unclear whether the “social benefit” type
analysis found in Quality Foods will catch on in other jurisdictions.
In the future, a well advised employer will continue to withhold and pay
FICA taxes on severance payments, and a well advised employee may use
Quality Stores to seek to avoid FICA withholding on severance.
Separation agreements are often negotiated, and the issue of tax
withholding is often subject to contentious disagreement between
employer and former employee. An employee will often argue that he or
she is being paid for something that is non-taxable or not subject to
withholding, while an employer will want to take the most conservative
approach, since they have the withholding obligation.This is a question
of law – not a business term – so the lawyers can argue ad nauseum about
it.The Quality Stores opinion gives us one more thing to disagree
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