Supreme Court To Decide If Severance Pay Should Be Taxed

The Court has accepted a case that will determine whether severance payments qualify as “wages,” which would make them subject to tax under the Federal Insurance Contributions Act (FICA). The case involves Michigan-based Quality Stores, a large agricultural specialty retailer that closed stores and fired employees in 2001 and 2002, and made severance payments to 3,100 people. The company and the employees paid FICA taxes as if the payments were wages, but the company disputes that determination, maintaining instead that the severance money was supplemental unemployment compensation. If the company prevails, the federal government will have to address the more than 2,400 refund claims, valued at more than $1 billion, already in the pipeline.