The United States Supreme Court recently ruled in US v. Quality Stores (March 2014) that severance payments are taxable wages pursuant to Federal Insurance Contributions Act (FICA). This decision resolves a split among the Circuit courts and reversed a Sixth Circuit decision.
In this case, Quality Stores filed for bankruptcy and provided severance payments. The payments were issued as wages and FICA taxes were withheld. Quality Stores later applied for a refund citing that the money was supplemental unemployment compensation benefits (SUBs) not subject to taxation. The case was litigated through the courts eventually reaching the nation’s highest court. The Supreme Court agreed with the IRS thereby disagreeing with Quality Stores and held they are wages subject to FICA.
The IRS takes a broad view of what is considered wages in order to tax the benefits. Withholding FICA taxes from most payments is generally the safest course of action to avoid penalties and fines for failing to withhold.
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