The recent Court of Appeals decision in United States v. Quality Stores creates a potential opportunity for employers to obtain substantial refunds on FICA and Medicare taxes paid in connection with severance payments.
Tax law imposes a tax on “wages” to fund both Social Security and Medicare. Both employers and employees are subject to this tax. It has long been clear that certain “supplemental unemployment benefits” (“SUB”) payments are not “wages” for FICA and Medicare tax purposes. To qualify as a SUB, the payment must:
The IRS takes the position those payments that do not meet these requirements—including most severance payments—are wages and, thus, are subject to taxation.
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