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Supreme Court Rules Severance Payments Are Wages Under FICA



The Supreme Court recently held that severance payments made to terminated employees qualify as “wages” under the Federal Insurance Contribution Act (FICA). Therefore, an employer liable for withholding and paying FICA taxes on employee wages must include the value of employee severance payments when calculating FICA obligations.


As a background to the case, the taxpayer at issue was a retailer that had begun bankruptcy proceedings in 2001 and, consequently, terminated its employees. The taxpayer made severance payments to its terminated employees under two plans:

  • Plan 1: The taxpayer’s terminated employees received severance payments based on job grade and management level.
  • Plan 2: The taxpayer’s terminated employees received severance payments based on the duration of their employment.

The taxpayer withheld FICA tax on the severance payments for both plans. In 2002, however, the taxpayer filed refund claims with the IRS for overpaid FICA taxes, claiming that the severance payments were not actually “wages” paid to former employees under FICA.

The Supreme Court decided against the taxpayer, holding that:

  • Severance payments are “wages” for FICA purposes because they constitute remuneration to the former employees and the employees received the payments based on their employment with the taxpayer.
  • FICA has a broad definition of “wages.” This definition is not limited by other Internal Revenue Code sections which provide guidance on withholding issues.

The Court reiterated that, for FICA purposes, “wages” generally means all payments for employment including the cash value of any non-cash payment. Supplemental unemployment compensation benefits (SUBs), which the taxpayer paid to its employees, are also specifically treated as “wages” under the Code. Therefore, the taxpayer’s severance payments were subject to FICA.

What Does CohnReznick Think?
Based on this decision, there is no reason to file protective claims to extend the statute of limitations.


For more information, please contact Kenneth J. Kanter, Managing Partner – Tax, at 973-364-6668.

To learn more about CohnReznick’s Tax Practice, please visit our webpage.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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