In 2001, Quality Stores, Inc. entered bankruptcy proceedings.  Before and during this process, Quality Stores terminated thousands of employees.  The terminated employees received severance payments according to one of two different termination plans.  Under the first plan, employees received severance pay based on their job grade and management level.  Under the second plan, officers received between six and twelve months of severance pay, and employees who had worked for at least two years received one week of severance pay for every year of service, up to a stated maximum.     

Quality Stores reported the severance payments as wages on W-2 tax forms, paid the employer's required share of the Federal Insurance Contributions Act (FICA) taxes, and withheld the employees' share of FICA taxes.  It then filed for a refund of $1,000,125 in FICA taxes on behalf of itself and its former employees.  The Internal Revenue Service (IRS) neither allowed nor denied the claim, and Quality Stores initiated a proceeding in Bankruptcy Court to recover the disputed amount.  The Bankruptcy Court granted summary judgment in Quality Stores' favor, and the district court and Court of Appeals for the Sixth Circuit affirmed, concluding that the severance payments were not "wages" under FICA.  The United States appealed, arguing that the FICA taxes must be withheld, and the United States Supreme Court agreed. 

FICA taxes any "wages" paid by an employer or received by an employee "with respect to employment" in order to fund benefits provided by the Social Security Act and Medicare.  FICA defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." 

The Court held that, as a matter of plain meaning, severance payments made to terminated employees are "remuneration for employment."  Severance payments are only made to employees, and are made in consideration for services performed by the employee.  They often vary, as they did in this case, according to the function and seniority of the terminated employee.  FICA also specifically exempts from taxable wages any severance payments made "because of…retirement for disability."  The Court reasoned that this exemption would be unnecessary if FICA's definition of "wages" did not include severance payments.

The Court then addressed the issue of whether section 3402(o) of the Internal Revenue Code related to income tax withholding is a limitation on the meaning of "wages" for FICA purposes.  The Court held that it is not.

Section 3402(o) provides that supplemental unemployment compensation benefits (SUBs) paid to an individual "shall be treated as if it were a payment of wages by an employer to an employee for a payroll period."  Assuming that severance payments are SUBs, Quality Stores argued that if SUBs are supposed to be treated "as if" they were wages for purposes of income tax withholding, then they cannot be wages.  Otherwise, the statute would be redundant.  The Court disagreed, noting that the FICA definition of "wages" and the Internal Revenue Code definition of "wages" for purposes of income tax withholding are broad, highly-similar, and contain certain exemptions.  Severance payments are not exempted from either definition of "wages."  Further, the statute is not redundant because Congress added it to the Internal Revenue Code in order to address a specific problem that is not at issue in this case.

Thus, the Court reversed the decision of the Court of Appeals for the Sixth Circuit and held that the severance payments Quality Stores provided to its employees are taxable wages under FICA.     


This case addresses the long-standing question of whether severance payments qualify as wages for purposes of paying and withholding FICA taxes.  Prior to the Supreme Court's decision, numerous companies filed for refunds from the IRS.  Had the Court reached a different conclusion, it is estimated that the IRS would have owed nearly $1 billion in refunds. 

United States v. Quality Stores, Inc. (2014) __ S.Ct. __ [2014 WL 1168968].