Are severance payments made to employees whose employment was involuntarily terminated subject to FICA tax? The US Supreme Court granted certiorari today in United States v. Quality Stores, Inc. [Briefs available at SCOTUSblog]
In 2001, Quality Stores and several affiliated companies entered into bankruptcy proceedings. Both before and after their entry into bankruptcy, the employers terminated thousands of their employees. Those employees received severance payments pursuant to two separate plans. The employers paid the tax, and then sued for a refund. It all ended up in bankruptcy court, and that court decided the payments were not wages, so no FICA taxes were owed. The 6th Circuit affirmed, In Re Quality Stores (6th Cir 09/07/2012). CSX Corp v. United States, 518 F.3d 1328 (6th Cir 2008) reached the opposite conclusion.
The issue is whether those severance payments are taxable as “wages” under the FICA.
Wow, how can these payments not be wages?
[For all employment cases pending at the Supreme Court, see Supreme Court Watch.]