Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
FICA Taxation of Severance Pay May Remain Thorny Issue Due To Conflicting Rulings
Author: Scarinci Hollenbeck, LLC
Date: January 11, 2013
Key Contacts
Back
Conflicting court rulings may lead to confusion and dispute over whether employers are required to pay Federal Insurance Contributions Act tax – or FICA taxes – on severance payments made to former employees.
The issue has been a contentious one, with the Internal Revenue Service asserting that severance payments are considered wages under tax law unless they meet specific conditions that would instead qualify them as supplemental unemployment benefits. Failing to meet the latter conditions would make severance payments subject to FICA taxation.
Under the narrow terms of the supplemental unemployment benefits exclusion, payments made on account of a worker’s involuntary termination due to a reduction in job force or closing of a facility may not be subject to FICA taxation, according to the IRS. In addition, payments must not be made in a lump sum, but instead made in a series of payments to complement state unemployment benefits.
In 2008, the Federal Circuit agreed with the IRS stipulations, noting that severance payments that fell outside the scope of the supplemental unemployment benefits definition are subject to FICA taxes, according to Bloomberg. However, a more recent ruling by the Sixth Circuit court resulted in more ambiguity by rejecting portions of the 2008 ruling. For example, the Sixth Circuit ruled that payments made in a lump sum to employees due to an involuntary separation from employment which stems from a reduction in force or the closing of a facility are exempt from FICA taxes. The court also noted that the payments do not have to be designed to supplement state benefits to be exempt from FICA.
As a result of the most recent ruling, many employers may now consider whether to request refunds from the IRS for FICA payments made in previous years. However, if the IRS chooses to appeal the ruling, it may continue to cause confusion.
- Practices: Tax and Trusts & Estates, Corporate Transactions & Business
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Smart Contract Legal Issues: Drafting Agreements for Blockchain
Smart contracts feature a unique blend of legal agreement and technical code. This innovation has the potential to reshape how business is conducted. At the same time, smart contract legal issues around enforceability, jurisdiction, identity, and compliance are common. The legal framework for these self-executing agreements is still evolving. What Are Smart Contracts? Smart contracts, […]
Author: Bryce S. Robins
Are Stay Interviews the Key to Retaining Top Talent?
Retaining top talent continues to be one of the greatest challenges facing employers today. Even in an employer’s market, the loss of a key employee can disrupt operations and result in significant costs. While compensation plays a role, long-term retention often depends on workplace culture, communication, and employee engagement. One increasingly popular strategy for improving […]
Author: Angela A. Turiano
Why Secured Transactions Are Important
Secured transactions form the backbone of a wide range of business dealings, including business loans, mortgages, and inventory financing. Because the stakes are often high and relatively minor oversights can have drastic consequences, lenders and borrowers should thoroughly understand how to form an enforceable security agreement that protects their legal rights. What Is a Secured […]
Author: Dan Brecher
Don’t Cash a “Paid in Full” Check Without Understanding the Legal Implications
Cashing a check marked “paid in full” can be a risky endeavor, particularly if you don’t fully understanding the legal implications. If you are owed more than the amount of the check you accept and deposit, you may waive your right to collect the full disputed amount. That is why you should consider either rejecting […]
Author: Dan Brecher
Changes to Qualified Small Business Stock Will Benefit Startup Founders and Investors
The One Big Beautiful Bill Act of 2025 (OBBBA) significantly impacts federal taxes, credits, and deductions. A key change relating to Qualified Small Business Stock (QSBS) allows greater tax-free gains for investments in startups and other qualifying small businesses. Company founders and other investors should understand how the enhanced tax strategy works or risk missing […]
Author: Dan Brecher
Corporate Consolidation and Antitrust Issues in Mergers
Corporate consolidation involves two or more businesses merging to become a single larger entity. The result is often a stronger and more competitive company that can better navigate today’s competitive marketplace. What Is Corporate Consolidation? Corporate consolidation closely resembles a basic merger transaction. The primary difference is that a consolidation creates an entirely new business […]
Author: Dan Brecher
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.