Severance Pay May be Subject to FICA

Tuesday, May 6th, 2014

Severance pay may now be subject to FICA taxes.  In a recent case, the US Supreme Court reversed a lower court decision and found that FICA’s broad definition of wages includes severance payments to employees who have been involuntarily terminated as part of a work-force reduction.  A main (but losing) argument before the Court was that wages as defined in the IRS’ supplemental unemployment benefits rules did not include severance payments.  However, without ruling whether supplemental unemployment benefits should continue to be exempt from FICA taxes, the Court found that the particular severance payments in issue were not tied to state unemployment benefits and so were, in fact, wages.  The issue of severance pay can be thorny, so before making such payments, seek advice.