Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

Supreme Court Rules Severance Payments = Wages

Author: Scarinci Hollenbeck, LLC

Date: April 3, 2014

Key Contacts

Back

The Supreme Court unanimously ruled that severance payments that are not associated with State unemployment benefits paid to involuntarily terminated workers were “wages” under the Federal Insurance Contributions Act (FICA). The decision reverses a 2012 decision by the Sixth Circuit and subjects severance payments to Social Security and Medicare taxes.

The issue before both the Sixth Circuit and the Supreme Court arose out of the bankruptcy filed by Quality Stores, Inc. In opposition to the IRS, Quality Stores alleged that severance paid to laid-off employees in connection with its bankruptcy were not taxable wages subject to FICA. In support of its argument, Quality Stores cited the income-tax withholding rules which define “wages” similarly as the FICA rules. Thus, Quality Stores argued that the “as if” language in the Internal Revenue Code Section 3401(o) of the withholding rules should be interpreted as excluding severance payments that qualify as supplemental unemployment compensation benefits from the definition of wages under FICA. Section 3401(o) provides that “any supplemental unemployment compensation benefit paid to an individual . . .  shall be treated as if it were a payment of wages.”

In rejecting this argument, the Supreme Court determined that Section 3401(o) of the withholding rules does not cause severance payments to fall outside of the broad definition of wages under FICA. This comprehensive interpretation of “wages” will likely have many consequences in a variety of circumstances for the next few years. For example, the IRS may rethink it’s position with regard to SUB plans which have been not been subject to FICA withholding but which logically should under the decision’s rationale.

The current result of the Supreme Court decision is that the IRS will not be required to refund overpaid FICA on severance payments to any employers who may have requested refunds based on the Sixth Circuit case, which were estimated to be more than $1 billion. Perhaps this ramification may have colored the Court’s thinking on this issue?

The result is that employers must now treat employee severance payments, that are not linked to the receipt of state unemployment insurance, as taxable employee wages for the purposes of FICA taxes.

If you have any questions about employee severance payments or would like to discuss your company’s employee policies and procedures, please contact me or the Scarinci Hollenbeck Labor and Employment Law attorney with whom you work. 

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
SPACs Are Back, What You Need to Know post image

SPACs Are Back, What You Need to Know

Special purpose acquisition companies (better known as SPACs) appear to be making a comeback. SPAC offerings for 2025 have already nearly surpassed last year’s totals, with additional transactions in the pipeline. SPACs last experienced a boom between 2020–2021, with approximately 600 U.S. companies raising a record $163 billion in 2021. Notable companies that went public […]

Author: Dan Brecher

Link to post with title - "SPACs Are Back, What You Need to Know"
Short Form Merger: Streamlining the Process for Businesses post image

Short Form Merger: Streamlining the Process for Businesses

Merging two companies is a complex legal and business transaction. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process that involves important corporate governance considerations. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process. However, […]

Author: Dan Brecher

Link to post with title - "Short Form Merger: Streamlining the Process for Businesses"
Tariff Response Options for Small Businesses Facing Financial Distress post image

Tariff Response Options for Small Businesses Facing Financial Distress

The Trump Administration’s new tariffs are having an oversized impact on small businesses, which already tend to operate on razor thin margins. Many businesses have been forced to raise prices, find new suppliers, lay off staff, and delay growth plans. For businesses facing even more dire financial circumstances, there are additional tariff response options, including […]

Author: Brian D. Spector

Link to post with title - "Tariff Response Options for Small Businesses Facing Financial Distress"
Common Causes of Partnership Disputes and How to Resolve Them post image

Common Causes of Partnership Disputes and How to Resolve Them

Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]

Author: Christopher D. Warren

Link to post with title - "Common Causes of Partnership Disputes and How to Resolve Them"
President Trump's Termination of Member Gwynne Wilcox post image

President Trump's Termination of Member Gwynne Wilcox

On January 28, 2025, the Trump Administration terminated Gwynne Wilcox from her position as a Member of the National Labor Relations Board (NLRB or the Board). Gwynne Wilcox, a union side lawyer for Levy Ratner, was confirmed to the Board for an original term in 2021 and confirmed again for a successive five-year term expiring […]

Author: Matthew F. Mimnaugh

Link to post with title - "President Trump's Termination of Member Gwynne Wilcox"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!