Paul L. Caron

Tuesday, March 25, 2014

Unanimous Supreme Court: Severance Payments Are Subject to Payroll Taxes

Supreme CourtThe Supreme Court today ruled 8-0 for the government in holding that severance payments are subject to payroll taxes.  United States v. Quality Stores, No. 12-1408 (Mar. 25, 2014):

Prior TaxProf Blog coverage:

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An elaboration of my comment is at:

Posted by: Eric Rasmusen | Mar 25, 2014 1:36:58 PM

The Court got it right, though the opinion evades a hugely important implication of the opinion's reasoning, which is that IRS regulations exempting supplemental unemployment insurance benefits from FICA are unlawful. A key paragraph is:

In concluding, the Court notes that the IRS still provides that severance payments tied to the receipt of state unemployment benefits are exempt not only from incometax withholding but also from FICA taxation. See, e.g.,Rev. Rul. 90–72, 1990–2 Cum. Bull. 211. Those Revenue Rulings are not at issue here. Because the severance payments here were not linked to state unemploymentbenefits, the Court does not reach the question whether the IRS’ current exemption is consistent with the broad definition of wages under FICA."

The implications for SUB's is something neither party to the case wanted to point out, so I'm glad the Court noticed it, even though it didn't give us dictum on it. I suppose nobody has standing to challenge the FICA exemption of SUB's anyway.

Posted by: Eric Rasmusen | Mar 25, 2014 1:15:07 PM

Why was there any doubt about this? Severance pay is a bit like vacation pay only you can't come back afterward.

Posted by: Michael W. Perry | Mar 25, 2014 1:01:49 PM