March 25, 2014
Supreme Court Rules that Certain
Severance Payments Are Subject to FICA
Taxes
Supreme Court Decision Resolves a Circuit Split Regarding Whether
Payments of Certain Severance Payments Constitute “Wages” for
Purposes of FICA
BACKGROUND AND DISCUSSION
Today, the Supreme Court resolved a split between the Circuit Courts of Appeals related to the treatment
of certain severance payments for purposes of the Federal Insurance Contributions Act (“FICA”), holding
that such payments constitute “wages” for such purposes.
FICA imposes a tax on employees and employers based on a certain percentages of “wages”, as that
term is defined for purposes of FICA, and requires employers to withhold the employees’ portion of the
tax from their wages.
1
The Internal Revenue Code (the “Code”) also requires employers to withhold
2
income taxes from “wages”, as defined for that purpose. The definitions of “wages” for purposes of FICA
and withholding are almost identical.
3
Taxpayers and the Internal Revenue Service (the “IRS”) have litigated whether so-called “supplemental
unemployment compensation benefits” payments that are not linked to the receipt of state unemployment
benefits (“SUB payments”) are “wages” subject to FICA tax. SUB payments are defined as “amounts
which are paid to an employee pursuant to a plan to which the employer is a party, because of an
employee’s involuntary separation from employment (whether or not such separation is temporary),
resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar
4
condition . . . .” The Code provides that SUB payments “be treated as if [they] were a payment of wages”
(emphasis added) and thus are subject to employer withholding for income tax.
New York
5
No mention is made of
Washington, D.C.
Los Angeles Palo Alto London Paris
Tokyo Hong Kong Beijing Melbourne Sydney
www.sullcrom.com
Frankfurt
SUB payments in FICA. Taxpayers have contended that the “as if” language implies that SUB payments
would not otherwise be “wages” for income tax withholding purposes and, therefore, not subject to FICA
tax.
The IRS has taken the position that most payments resembling SUB payments constitute “wages” for
FICA purposes.
6
In particular, according to the IRS, payments that meet the definition of SUB payments
but that are made in lump sum constitute “wages” for FICA purposes because the SUB payments are not
linked to the receipt of state unemployment compensation.
7
In 2008, the Federal Circuit agreed with the IRS’ position, in CSX Corp. v. United States, reversing the
8
Court of Federal Claims, which had accepted the taxpayer’s argument. In 2012, the Court of Appeals for
the Sixth Circuit held in United States v. Quality Stores, Inc. that, based on the statutory language and the
relevant legislative history, amounts that meet the definition of SUB payments do not constitute “wages”
for purposes of FICA and thus are not subject to FICA tax.
9
Today, the Supreme Court reversed the decision in Quality Stores, holding that SUB payments constitute
“wages” for purposes of FICA.
10
The Court based its decision on the plain meaning of the statutory
language, which the Supreme Court reasserted as having “substantial breadth,”
11
and the fact that while
FICA provides for a number of specific exceptions to the definition of “wages,” no such exception covers
SUB payments. The Supreme Court rejected the taxpayer’s argument, accepted by the Court of Appeals
for the Sixth Circuit, based on the “as if” language in the Code, stating that Congress intended to cause
all severance payments to be treated “as if” they were wages, irrespective of whether some such
payments were so treated even in the absence of this language.
12
The Court concluded by noting that it did not reach the question whether the IRS’ continuing exemption
13
of severance payments that are linked to the receipt of state unemployment benefits is consistent with the
broad definition of “wages” under FICA.
*
*
*
Copyright © Sullivan & Cromwell LLP 2014
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March 25, 2014
ENDNOTES
1
See Sections 3101, 3102, 3121. While the Social Security portion of the FICA tax is currently
imposed on wages up to a maximum of $117,000, the Medicare portion of the FICA tax, currently
2.9% of wages (1.45% on employers and 1.45% on employees), with an additional tax of 0.9%
imposed on wages above certain threshold amounts, applies without limitation.
2
See Sections 3401, 3402.
3
See Sections 3121, 3401.
4
Section 3402(o)(2)(A).
5
Section 3402(o)(1), flush language.
6
Revenue Ruling 90-72, 1990-2 C.B. 211.
7
Id. at 212.
8
518 F.3d 1328 (Fed. Cir. 2008).
9
693 F.3d 605 (6th Cir. 2012).
10
United States v. Quality Stores, Inc., No. 12–1408 (Mar. 25, 2014).
11
Id., slip op. at 4 (citing Social Security Bd. v. Nierotko, 327 U.S. 358 (1946)).
12
Id., slip op. at 12–13.
13
Revenue Ruling 90-72, supra.
-3Supreme Court Rules that Certain Severance Payments Are Subject to FICA Taxes
March 25, 2014
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March 25, 2014
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