Supreme Court to Hear Arguments on whether FICA is Owed on Severance Pay

taxToday the Supreme Court will hear arguments in the case of U.S. v. Quality Stores.  The issue before the Court is whether FICA needs to be withheld and paid on severance payments.  The question is whether severance payments are “remuneration for employment” which are taxable for FICA purposes (as the IRS and Obama administration argue) or “supplemental unemployment benefits” which aren’t taxable for FICA purposes (as the former employer Quality Stores argues).  In September 2012, the 6th Circuit Court of Appeals ruled in Quality Stores’ favor, holding that the severance payments to former employees were not taxable under FICA and that the amounts paid to the government should be refunded.   While the amount at issue in the Quality Stores case is relatively modest, a decision in Quality Stores’ favor would open the door to employers across the country seeking FICA refunds.  We expect a decision in June and will post an update when it’s issued.