Severance Payments Not Subject to FICA

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The Court of Appeals for the Sixth Circuit, has recently held in US v. Quality Stores Inc. that severance payments are not subject to FICA taxes.  Accordingly, it allowed a refund of over $1 million in employer and employee FICA taxes paid on the severance payments.   The Sixth Circuit determined that the severance payments at issue qualified as supplemental unemployment compensation benefits under Code Sec. 3402(o) and were not taxable wages for income tax purposes.

Downsizing is rather common in today’s business environment and often results in severance payments to terminated workers. The Court’s decision gives companies who made such payments to terminated workers, and the workers themselves, an opportunity to recover FICA taxes paid on the severance payments.   Future severance payments also may escape FICA taxes under the authority of this Court case.  Employers and terminated employees in the Sixth Circuit, which includes Ohio, Michigan, Kentucky and Tennessee, should carefully consider filing a refund claim.

Some caution is advised however.  The Federal Circuit has reached a contrary result on similar facts.  In view of these conflicting decisions and given the potential amount of revenue involved, the IRS may well appeal the current Court case to the Supreme Court.

If you paid FICA tax with respect to severance payments to terminated employees in the last few years, and you are interested in filing for a refund or finding out more about the court case, please call or email me at 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING.  The Small Business Jobs Act of 2010 removed cell phones from the list of items for which detailed substantiation record keeping was required.   To provide guidance concerning how to handle reimbursements and stipends paid to employees who use cellphones, the IRS released Notice 2011-72.   The Notice states that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee.  And the IRS will not require the employee to maintain detailed records of business use in order to receive this tax-free treatment.    Please call or email me at 937-223-1130 or jsenney@pselaw.com with any questions.