In this e-Alert, we address the recent United States Supreme Court decision in U.S. v. Quality Stores, Inc., et al, No. 12-1408 (Sup. Ct. 03/25/2014), whereby the United States Supreme Court unanimously overturned the prior ruling made by the U.S. Court of Appeals for the Sixth Circuit, which was previously discussed here. The stakes of this case were large as the federal government was faced with over 2,400 refund claim filings, which amounted to more than $1 billion in potential refunds to be made.
In reversing the Sixth Circuit, the Supreme Court held that severance payments which are made to involuntarily terminated employees are subject to tax under the Federal Insurance Contributions Act (FICA). The Supreme Court concluded that the severance payments made by Quality Stores fell within the broad definition of "wages" for FICA tax purposes and, thus, were taxable. However, the Supreme Court did not change the IRS position that severance payments that are tied to the receipt of state unemployment benefits are not subject to FICA tax. Employers must carefully consider such arrangements to meet both the federal and state tax requirements, but with proper planning, employers and employees can jointly benefit by tying severance payments to the receipt of state unemployment benefits.
As a result of this Supreme Court decision, taxpayers who filed protective refund claims for overpaid FICA taxes in reliance on the Sixth Circuit's holding are no longer eligible to receive such refunds. Additionally, any taxpayer who relied on the Sixth Circuit's holding and did not withhold FICA taxes from severance payments may want to consider filing amended Form 941s and paying any additional tax that may be due. Taxpayers who have always treated severance payments as "wages" subject to FICA tax will see little impact from this decision.
This decision will directly implicate numerous other Chapter 11 bankruptcy cases and attendant employee bankruptcy claimants.
Further this decision will impact employer-employee negotiations for future severance packages and may well impact employment litigation settlements.
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Polsinelli PC provides these e-Alerts periodically to keep our clients, taxpayers and businesses updated on recently adopted legislation and key changes in tax laws.