TAX TIPS
March 7, 2014
POTENTIAL FICA TAX REFUND
OPPORTUNITY FOR EMPLOYERS
By CJ Stroh, Esq., Tax Accountant
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CJ Stroh
[email protected]
The Supreme Court of the United States recently heard arguments
in its review of Quality Stores, Inc., a case that has produced a split
in authority as to whether Supplemental Unemployment Benefits
(“SUB” payments) are subject to FICA tax. SUB payments are a
type of severance payment, and if Quality Stores is upheld, the
result could produce billions of dollars in FICA tax refunds to
employers and their former employees for tax years during which
severance payments were made, and for which protective FICA tax
refund claims were filed.
CASE LAW BACKGROUND
In Quality Stores, the employer (“Quality”) had an involuntary Chapter 11 bankruptcy petition
filed against them, was forced to close down their stores and made severance payments to
involuntarily terminated employees. The payments were not attributable to the rendering of any
particular employment service or tied to the receipt of state unemployment compensation. For
each of the severance payments, Quality withheld federal income tax and the employees' share
of FICA tax, and paid the employer's share of FICA tax. However, Quality later filed for a refund,
taking the position that the severance payments were not “wages,” but instead were SUB
payments that were not subject to FICA.
The U.S. Court of Appeals for the Sixth Circuit ruled in favor of Quality, affirming the prior
decisions of the bankruptcy and district courts. The Sixth Circuit’s reasoning was as follows:
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Under FICA, “wages” are subject to FICA taxation, but SUB payments are neither expressly
included nor excluded as part of this definition of “wages;”
Congress, for purposes of federal income tax withholding, had adopted a definition of
“wages” that was nearly identical to the definition included in FICA;
Congress must have intended the term “wages” to carry the same meaning for purposes of
FICA and federal income tax withholding;
SUB payments are not “wages” with respect to federal income tax withholding based upon
the plain language of the IRC section in which SUB payments are defined (IRC §3402(o),
entitled “extension of withholding certain payments other than wages”);
If SUB payments are not “wages” for purposes of federal income tax withholding, they are
not “wages” under FICA.
(Continued on page 2)
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New Jersey. New York. Pennsylvania. Maryland. Florida. Colorado.
Employers that have paid
qualifying SUB or severance
payments during 2010 and/
or subsequent tax years
should consider filing a
protective tax refund claim.
TAX TIPS
POTENTIAL FICA TAX REFUND OPPORTUNITY FOR
EMPLOYERS (CONTINUED)
This holding contradicted the Federal Circuit's 2002 decision CSX Corp. v. U.S. (CA Fed Cir
3/6/2008), which ruled that severance pay involved in the taxpayer's various downsizing
programs was subject to FICA. As a result, the Supreme Court granted certiorari to review
Quality Stores and resolve the matter of whether or not SUB payments are subject to FICA.
WHAT DO EMPLOYERS NEED TO DO?
If you have any questions,
please contact our National
Tax Services Group at
609.520.1188 or e-mail
[email protected]
Employers that have paid qualifying SUB or severance payments during 2010 and/or
subsequent tax years should consider filing a protective tax refund claim in case the Supreme
Court affirms the Quality Stores decision. Refund claims can only be made for 2010 and
subsequent tax years because the statute of limitations imposed by the IRS requires that refund
claims be filed within three years from the date the original return was filed. A Supreme Court
decision will likely not be reached until after the deadline for tax returns, meaning protective
claims for the 2010 tax year must be filed by April 15, 2014 to be valid.
A SUB payment is:
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An amount paid to an employee;
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Pursuant to an employer’s plan;
▪
▪
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Because of an employee’s involuntary separation from employment, whether
temporary or permanent;
Resulting directly from a reduction in force, the discontinuance of plant operation,
or other similar conditions; and
Included in the employee’s gross income.
A protective refund claim includes:
▪
An adjusted employer’s quarterly federal tax return or claim for refund (Form 941-X);
▪
A disclosure statement (Form 8275); and
▪
A cover letter explaining the facts and circumstances that resulted in the protective
refund claim being filed.
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New Jersey. New York. Pennsylvania. Maryland. Florida. Colorado.
Tax Tips are published by WithumSmith+Brown,
PC, Certified Public Accountants and
Consultants, for clients and friends of the Firm.
The information contained in this publication is
for informational purposes and should not be
acted upon without professional advice. Please
contact any one of our offices with your inquiries.