March 8, 2010
Severance pay for laid-off employees isn’t subject to Social Security taxes, a district court says in a case involving a bankrupt retailer that closed all its stores and let its staff go. The court noted that the tax code specifically requires employers to treat severance paid to laid off workers as if it is wages for withholding purposes. This indicates that severance is not otherwise treated as wages, and thus is exempt from FICA tax. The court also nixed IRS’ position that severance avoids FICA tax only if it is tied to receipt of unemployment benefits (Quality Stores, D.C., Mich.).
IRS almost certainly will appeal. In 2008, it won an Appeals Court case on this issue. But the district court here expressly repudiated that Court’s analysis.
Click here for the link for the case.
Source: Kiplinger Tax Letter, March 5, 2010
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