Recent Court Case Highlights Potential Tax Refund Opportunity

December 13, 2012 11:21 AM

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. 

The Law
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:

  • follow the involuntary separation of the employee;
  • supplement state unemployment benefits;
  • not be made in a lump sum;
  • be based on the employee’s seniority and not on the rendering of any services; and
  • provide that no employee has any interest in the fund paying the benefits until the employee is eligible to receive benefits.

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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