Good news: You can claim a refund for FICA taxes on severance pay
A recent court decision for one company means it’s now time to look back at your spending on severance pay.
In the Sixth Circuit Court of Appeals case of United States v. Quality Stores, the court found that severance payments qualifying as supplemental unemployment compensation are excluded from the Internal Revenue Code’s statutory definition of “wages” and therefore are not subject to FICA employment taxes.
Your company may have had to pay out severance pay in the past few years, whether it was due to a reduction in force, facility closing or discontinuing of certain operations.
In the case, Quality Stores disagreed with the IRS that severance payments constituted wages for FICA purposes, and argued that the payments were supplemental unemployment benefits, not wages.
The court agreed, but their decision flies directly in the face of an earlier case that says the opposite. This means that a Supreme Court review of this case could be inevitable. But in the meantime, the ruling means you should be claiming a refund ASAP.
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