U.S. Supreme Court Rules that Severance Payments are Taxable Wages for FICA Purposes

On March 25, 2014, the United States Supreme Court held that severance payments made by an employer to its involuntarily terminated employees constitute taxable wages for purposes of FICA.  United States v. Quality Stores, 572 U.S.__ (2014).  The Supreme Court reversed the holding of the Sixth Circuit Court of Appeals, that severance payments are exempt from FICA taxation.  The Supreme Court based its decision in part upon the broad definition of "wages" under FICA as "all remuneration for employment," as well as the broad definition of "employment" under FICA as "any service of whatever nature performed...by an employee for the person employing him."  Notably, the Supreme Court stated that severance payments are also wages for purposes of income tax withholding.  United States v. Quality Stores. 

The Supreme Court's Opinion in Quality Stores removes any doubt that severance payments are wages for purposes of income tax withholding and FICA taxation.  Consequently, in structuring severance agreements, severance payments should be treated as wages subject to income tax withholding and FICA.  Employers should process severance payments accordingly.  The severance agreement should distinguish between the gross amount of the severance and a net amount after withholdings and deductions.  Employers and employment law practitioners should be mindful of Quality Stores in drafting severance agreements.