Supreme Court: Severance Payments Are Wages Subject to FICA Withholding

This morning, a unanimous Supreme Court held that severance payments made to involuntarily terminated employees constitute “wages” for purposes of FICA withholding.   U.S. Quality Stores, Inc., No. 12-1408 (3-25-14).   In that case, the employer made severance payments to employees who were laid off during the employer’s bankruptcy.  The amount of the payments varied depending on their position and length of service. Although it initially made the required FICA withholding from the payments, it later sought a refund on the grounds that severance pay is exempt from FICA withholdings.  The IRS did not respond.  The bankruptcy court granted summary judgment against the IRS in favor of the employer and was affirmed by the district court and Sixth Circuit.    However, the Supreme Court found that “wages” as defined in FICA included all renumeration for employment and the exceptions merely highlighted that regular severance pay constituted wages.   Based in part on legislative history, the Court rejected the IRC language treating supplemental unemployment benefits “as if” they were wages meant that severance pay also fell outside the definition of wages.

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