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US Supreme Court Rules FICA Taxes Apply to Most Severance Pay Plans

This report relates to 2 case(s)

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    CSX Corp, Inc., v. U.S., 518 F. 3d 1328 (0 other reports)

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    U.S. v. Quality Stores Inc., No. 12-1408 (0 other reports)

Author: Alice Gilman


Under the Internal Revenue Code (IRC), all payments made to employees are taxable, even if the employment relationship has ended. Severance pay, therefore, is taxable to employees. Supplemental unemployment benefits (SUB pay) were created in the 1950s as a means for employers to supplement employees' unemployment benefits. Among the IRS's criteria for excluding SUB pay from FICA (Social Security and Medicare) taxes is that employees' receipt of SUB pay must be linked to their receipt of state unemployment benefits. This means that employees must receive their SUB pay periodically, and not in lump sums.

While SUB pay is not considered wages for income tax withholding purposes, it is subject to income tax withholding as if it were wages under IRC § 3402(0). However, this does not mean that it is automatically excluded from wages for FICA tax purposes. The key issue for the Supreme Court was whether the income and FICA tax statutes must be read in parallel so that SUB pay, which is not wages for income tax withholding purposes, but is merely treated as wages for income tax withholding purposes, is similarly excluded from FICA withholding as a non-wage payment.