On March 25, 2014, the U.S. Supreme Court ruled in an 8-0 decision that severance payments made to involuntarily terminated employees are taxable wages under the Federal Insurance Contributions Act (“FICA”) in United States v. Quality Stores, Inc.  In doing so, the Court reversed the decision of the Sixth Circuit that severance payments do not constitute wages subject to FICA taxes, and upheld prior rulings in the Federal, Third, and Eighth Circuits that at least some severance payments do constitute wages subject to FICA taxes.  

In the opinion, the Court found that severance payments clearly fall within the broad definition of “wages” for FICA tax purposes.  The Court also held that Section 3402(o) of the Internal Revenue Code of 1986, as amended, which requires that supplemental unemployment compensation benefits (which includes severance payments) be “treated as wages” for income-tax withholding purposes, cannot be read to exclude all severance payments from the definition of wages for FICA tax purposes.  The Court’s ruling thus affirms severance payments are subject to FICA taxes and prevents substantial potential FICA tax refunds for employers, many of whom filed protective refund claims following the Sixth Circuit’s decision. 

For a copy of the Court’s opinion, click here.