Paul L. Caron

Saturday, November 9, 2013

WSJ: Is Severance Pay Subject to Payroll Tax?

Wall Street Journal Tax Report:  Can Severance Pay Be Taxed?, by Laura Saunders:

A year ago, we reported a disagreement between two federal appeals courts as to whether payroll taxes are due on severance payments made to laid-off workers. We predicted the issue could wind up before the U.S. Supreme Court.

Now it has. In October, the court said it would hear one of the cases, U.S. v. Quality Stores, which the Sixth Circuit decided in favor of taxpayers. Oral arguments are scheduled to begin Jan. 14.

A great deal of money is at stake. More than 2,400 claims have been filed requesting total refunds of more than $1 billion in Social Security and Medicare taxes, according to Internal Revenue Service data cited in the government's petition to the court. ...

How will the court rule? Experts say the outcome of tax cases often is hard to predict, in part because the justices accept very few of them. "Severance is paid in lieu of further wages, so the government has a good argument in favor of the tax," says Michael Graetz, a tax-law scholar who teaches at Columbia University's law school. "On the other hand, the government has lost its last three tax cases in the Supreme Court."

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