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.
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
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Author: Jesse M. Dimitro
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Author: Jesse M. Dimitro
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Author: Scarinci Hollenbeck, LLC
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
Author: Dan Brecher
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
Author: Ronald S. Bienstock
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
Author: Patrick T. Conlon
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.
FICA Taxation of Severance Pay May Remain Thorny Issue Due To Conflicting Rulings
Author: Scarinci Hollenbeck, LLC
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.