Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
FICA Taxation of Severance Pay May Remain Thorny Issue Due To Conflicting Rulings
Author: Scarinci Hollenbeck, LLC
Date: January 11, 2013
Key Contacts
Back
Conflicting court rulings may lead to confusion and dispute over whether employers are required to pay Federal Insurance Contributions Act tax – or FICA taxes – on severance payments made to former employees.
The issue has been a contentious one, with the Internal Revenue Service asserting that severance payments are considered wages under tax law unless they meet specific conditions that would instead qualify them as supplemental unemployment benefits. Failing to meet the latter conditions would make severance payments subject to FICA taxation.
Under the narrow terms of the supplemental unemployment benefits exclusion, payments made on account of a worker’s involuntary termination due to a reduction in job force or closing of a facility may not be subject to FICA taxation, according to the IRS. In addition, payments must not be made in a lump sum, but instead made in a series of payments to complement state unemployment benefits.
In 2008, the Federal Circuit agreed with the IRS stipulations, noting that severance payments that fell outside the scope of the supplemental unemployment benefits definition are subject to FICA taxes, according to Bloomberg. However, a more recent ruling by the Sixth Circuit court resulted in more ambiguity by rejecting portions of the 2008 ruling. For example, the Sixth Circuit ruled that payments made in a lump sum to employees due to an involuntary separation from employment which stems from a reduction in force or the closing of a facility are exempt from FICA taxes. The court also noted that the payments do not have to be designed to supplement state benefits to be exempt from FICA.
As a result of the most recent ruling, many employers may now consider whether to request refunds from the IRS for FICA payments made in previous years. However, if the IRS chooses to appeal the ruling, it may continue to cause confusion.
- Practices: Tax and Trusts & Estates, Corporate Transactions & Business
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Eviction Is Not Always the End: Understanding Post-Possession Rent Claims in New Jersey and New York
No. An eviction does not automatically end a tenant’s obligation to pay rent. Post-eviction rent claims are common because recovering possession resolves who has the right to occupy the premises, but it does not extinguish the tenant’s contractual obligations under the lease. Whether unpaid or future rent remains owed depends on three factors: the lease’s […]
Author: Donald M. Pepe
Company Dissolved? Legal and Financial Consequences to Expect
A company is dissolved; legally, it ceases to exist. Accordingly, dissolution results in significant legal and financial consequences. It is a process that must be properly managed to avoid continuing liability. The Corporate Dissolution Process Corporate dissolution is the legal process of formally closing a corporation, paying its debts and distributing the remaining assets. Most […]
Author: Jay McDaniel
The Legal Implications of Signing a Triple Net Lease
A triple net lease is a commercial lease in which the tenant pays the property’s real estate taxes, insurance, and maintenance costs, known as the three nets, in addition to base rent. They are most often used in freestanding retail and office buildings and in large single-tenant industrial properties, with terms that typically run 10 […]
Author: Donald M. Pepe
When to Settle and When to Fight: A Litigator's Framework
Every lawsuit comes with a cost, and knowing when to settle a lawsuit is one of the most consequential decisions a business owner will face. Experienced litigators understand how to minimize cost and obtain certainty for their clients. For many business owners, the decision is viewed almost entirely through a financial lens: What will it cost […]
Author: Sean M. Pena
When Does a Business Need a Corporate Attorney?
A corporate attorney advises businesses on formation, ownership, governance, contracts, transactions, compliance, disputes, and the legal risks that arise as a company grows. The role is not limited to filing documents or reviewing agreements. A corporate attorney helps a business understand when a commercial decision has legal consequences, how to structure that decision properly, and […]
Author: Scarinci Hollenbeck, LLC
A Whistleblower Just Filed a Complaint Against Your Company: Here's What to Do Now
Few situations create more uncertainty than learning that an employee has filed a whistleblower complaint. Questions arise immediately: Is the allegation legitimate? Should the employee be placed on leave? Do we need to notify our insurance carrier? Are we now prevented from disciplining the employee if there are unrelated ongoing work related issues? There is […]
Author: Sean M. Pena
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.