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
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public
Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]
Author: Bryce S. Robins
Understanding Chattel Paper: A Key Component in Secured Transactions
Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]
Author: Dan Brecher
Crypto Compliance: A Comprehensive Guide
For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]
Author: Bryce S. Robins
Supreme Court and Title VII: Implications for Reverse Discrimination
Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]
Author: Matthew F. Mimnaugh
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
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
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.