On March 25, 2014, the United States Supreme Court issued its decision in the Quality Stores case, finding severance payments are subject to FICA taxes.
Quality Stores (and its affiliates) made severance payments to employees that were involuntarily terminated in connection with the company’s Chapter 11 bankruptcy. In connection with severance payments, the company initially paid and withheld taxes required under FICA. However, the company subsequently determined the severance payments should not have been taxed as wages under FICA and, as a result, sought a refund on behalf of itself and approximately 1,850 former employees. The IRS refused to issue the requested refunds and the company initiated proceeding in the Bankruptcy Court, which granted summary judgment in favor of Quality Stores. Both the District Court and the Sixth Circuit affirmed the Bankruptcy Court’s judgment. The United States sought review from the Supreme Court and certiorari was granted.
The Supreme Court held:
The severance payments here were made to employees terminated against their will, were varied based on job seniority and time served and were not linked to the receipt of state unemployment benefits. Under FICA’s broad definition, these severance payments constitute taxable wages.
This decision settles a split among the circuits, which resulted when the Sixth Circuit ruled that the severance payments did not constitute “wages” under FICA while the Third, Eighth and Federal Circuits had previously concluded at least some severance payments were in fact taxable wages.