Wednesday, September 16, 2015

Severance Pay is Subject to FICA Taxes

The decision is final until the law changes.  Over the past few years IRS and taxpayer have argued this issue in the courts.  Taxpayers argued severance pay is not subject to FICA taxes and IRS argued it falls into the definition of “wages and compensation” and is subject to FICA taxes.

The US Court of Appeals for the Sixth Circuit ruled severance pay did not fall into the definition of wages/compensation and were not subject to FICA taxes in the case of US v Quality Stores Inc.  IRS appealed to the Supreme Court.

The Supreme Court reached a unanimous 8-0 decision determining the severance pay is subject to FICA taxes as compensation.  Although FUTA taxes were not part of this decision, IRS has taken the position that severance pay subject to FICA is also subject to FUTA.

As a result of this case IRS has disallowed all claims (over 3,000 taxpayers) for refunds of FICA taxes on severance pay.  IRS recently issued Announcement 2015-08 with the above information.

Some taxpayers may have filed a refund claim based on an additional basis or different basis than the issues involved in Qualify Stores Inc.  For these taxpayers the Announcement gives the name and telephone number of the IRS person to contact for information regarding how to proceed with their appeal request for that portion of the disallowed claim.

This text has been shared with you courtesy of David & Mary Mellem, EAs & Ashwaubenon Tax Professionals.

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