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Tax Tip: Whether Severance Payments are Subject to FICA Tax

May 02, 2011

An employer who made severance payments to terminated employees or terminated employees who received severance payments — should consider filing a timely claim — for refund if FICA taxes were withheld and paid by the employer.

A recent district court decision, U.S. Quality Stores, Inc., et al., February 23, 2010, concluded that any payment to an employee pursuant to a plan under which payments are made to an employee because of the employee's involuntary separation from employment (whether or not temporary) resulting directly from a reduction in force, the discontinuance of a plant or operation or other similar conditions while includible in gross income for purposes of the income tax are excludable from being considered "wages" subject to FICA or FUTA tax.

Recommended Action
While it is understood that this judgment will be appealed, you can file protective refund claims for FICA taxes paid on account of severance pay.  While no refunds will be issued until the appeals process is exhausted, companies should file protective refund claims for FICA tax paid on severance pay, citing this decision.  This is particularly true for businesses that had layoffs in 2006 that are within the statute of limitations, claims may be submitted on Form 843 or Form 941X. Employees can file for their half of the FICA tax or the employers can claim both halves.  If claiming both, employers must first refund the workers' share or get their consent to claim for their portion.   If successful, the employer agrees to refund the employees' share of FICA directly to them.

For more information, or to determine how and if the above provision applies to your situation, please contact John Spatcher at jspatcher@blumshapiro.com or 860.561.6818

 

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