Legal

Legal Briefings: For Severance Pay, Companies Have to Pay Taxes

By

Jul. 1, 2014

Quality Stores Inc. made severance payments to employees who were involuntarily terminated as part of its Chapter 11 bankruptcy. Quality Stores paid and withheld taxes required under the Federal Insurance Contributions Act, or FICA, but later sought a refund from the U.S. Internal Revenue Service on behalf of itself and about 1,850 employees believing that the payments should not have been taxed as wages under FICA.

When the IRS neither allowed nor denied the refund, Quality Stores initiated proceedings in bankruptcy court, which allowed the refund and held the payments were not taxable as wages. Both the federal district court and the U.S. Court of Appeals for the 6th Circuit affirmed the decision.

The Supreme Court reversed and held that severance payments were taxable because FICA’s definition of wages includes “severance payments made to terminated employees.” United States v. Quality Stores Inc., U.S., No. 12-1408 (March 25, 2014).

IMPACT: Employers paying terminated employees under a severance plan may be required to pay and withhold FICA taxes.

About Workforce.com

blog workforce

We build robust scheduling & attendance software for businesses with 500+ frontline workers. With custom BI reporting and demand-driven scheduling, we help our customers reduce labor spend and increase profitability across their business. It's as simple as that.

Book a call
See the software

Related Articles

workforce blog

Compliance

Minimum Wage by State in 2022 – All You Need to Know

Summary The federal minimum wage rate is $7.25, but the rate is higher in 30 states, along with Washing...

federal law, minimum wage, pay rates, state law, wage law compliance

workforce blog

Legal

California’s push for a 32-hour workweek explained, and how to prepare

Summary: California is considering a 32-hour workweek bill for businesses with over 500 staff 4 day wee...

32 hour workweek, 4 day workweek, california, legislature, overtime

workforce blog

Legal

A business owner’s guide to restaurant tipping law

Business owners in the restaurant industry are in a unique position when it comes to employee tips. As ...

restaurants, tip laws, tipping