March 2014
Protective Refund Claims for FICA Tax Update:
U.S. Supreme Court Ruling – Severance
Payments are Taxable Wages for FICA Purposes
The U.S. Supreme Court decided March 25, 2014, that severance payments are wages for FICA tax
purposes, reversing decisions of the Federal District Court for the Western District of Michigan and the U.S.
Court of Appeals for the Sixth Circuit in United States v. Quality Stores, Inc. As a result of the Supreme
Court’s decision, there will be no refunds of FICA taxes withheld on severance payments. Many taxpayers
had filed protective refund claims for prior withholdings pending the final decision in the Quality Stores case.
It is anticipated that the IRS will issue rejection notices with respect to these protective claims for refund in
the near future. No additional action is necessary at this time.
Summary of U.S. Supreme Court’s Ruling
The Supreme Court noted that the FICA statute defines “wages” as “all remuneration for employment.”
Because the severance payments provided by Quality Stores varied based on the employee’s function and
seniority, the court reasoned that the payments were made in consideration for services rendered as an
employee, and were therefore wages within the meaning of the FICA statute. The Supreme Court
emphasized that service, “means not only work actually done but the entire employer-employee relationship
for which compensation is paid to the employee by the employer.”
Quality Stores’ chief argument was that the income tax withholding statute (Internal Revenue Code Section
3402) specifically provides that certain severance payments, specifically supplemental unemployment
compensation benefits, are treated “as if” they were a payment of wages. The FICA statute (Internal
Revenue Code Section 3121) does not contain a similar language. Based on the absence of similar
language in the FICA statute, Quality Stores asserted that whereas Congress specifically intended to include
supplemental unemployment compensation benefit payments in the definition of wages for purposes of
income-tax withholding, the plain language of the FICA statute does not show similar congressional intent
with respect to FICA tax; accordingly, the amounts paid by Quality Stores were not wages for FICA tax
purposes.
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Ultimately, the Supreme Court held that the severance amounts paid by Quality Stores squarely fall within
the FICA statute’s broad textual definition of wages. Accordingly, the Supreme Court reversed the lower
courts’ decisions and remanded the case to the District Court for further proceedings consistent with the
opinion. It is important to note that the Supreme Court’s decision does not impact the limited exclusion from
FICA wages that has historically applied to severance payments that are linked to state unemployment
benefits, commonly referred to as supplemental unemployment benefits.
If you have any questions, please contact your tax advisor or
Michael Krucker
877.622.2257 ext. 57822
[email protected]
James Minutolo
877.622.2257 ext. 44722
[email protected]
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not
rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability
whatsoever in connection with its use.
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