FICA on Severance Pay

[Snaggletooth]

A recent district court ruling awarded a Michigan retailer a victory against the IRS. Quality Stores, a chain store, shut down all their stores and terminated their staff, giving them severance pay.

The ruling stated that severance pay was not subject to FICA, for either the employee or the matching employer. The article said they didn't know whether the IRS was going to acquies or continue to slug it out in court or accept the ruling as a precedent.

Anyway, we're told the way to "lock in" client refunds would be to file 941Xs for the periods affected. Here's the rub -- the money process has to be the same as it was collected, in other words, the employer must FIRST PAY BACK the withheld FICA before claiming the refund on the 941X, at which point they may claim the entire FICA tax effect.

This means if our client pays the employees this FICA, they will have to await acquiescence from the IRS (if this ever happens).

Any other knowledge or advice on this?

[New York Enrolled Agent]

A recent district court ruling awarded a Michigan retailer a victory against the IRS. Quality Stores, a chain store, shut down all their stores and terminated their staff, giving them severance pay.

The ruling stated that severance pay was not subject to FICA, for either the employee or the matching employer. The article said they didn't know whether the IRS was going to acquies or continue to slug it out in court or accept the ruling as a precedent.

I don't believe the case is as simple as that.

I would simply offer a caution that the original case you cite was a case where there was a company bankruptcy involved. I think as a general rule severance pay would be subject to FICA. The decision was indeed against the government but I think the bankruptcy court determined the payments involved were to be treated as "supplemental unemployment compensation payments" rather than "wages". I believe the district court accepted the bankruptcy court's determination. IMO, this is not a precedent for all severance pay.

The IRS did ask the bankruptcy court to review its decision after an Appeals Court took issue with one of the cases cited by the bankruptcy court in it's original decision. The bankruptcy court refused to review.

[New York Enrolled Agent]

The ruling stated that severance pay was not subject to FICA, for either the employee or the matching employer. The article said they didn't know whether the IRS was going to acquies or continue to slug it out in court or accept the ruling as a precedent.

Well the IRS slugged it out and won. The Supreme Court overruled the lower courts including the 6th Circuit Court of Appeals and agreed the Quality Stores severance pay was subject to FICA.

[taxea]

NYEA did they give an explanation? One would think the money was not "earned" income.