Washington Tax Alert October 19, 2012 (FICA taxes on severance payments)

Washington Tax Alert from Don Barnes, [email protected]

October 19, 2012

Last month, the Court of Appeals for the Sixth Circuit ruled that severance payments by a company that closed all its facilities and terminated the employment of all its employees were not subject to FICA taxes. United States v. Quality Stores, Inc., No. 10-1563, 2012 TNT 175-18 (6th Cir. 2012). The decision in Quality Stores is contrary to an earlier decision by the Court of Appeals for the Federal Circuit. CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008).

Because there are conflicting appellate court decisions on this issue and the government may seek Supreme Court review to resolve the conflict, taxpayers that have made severance payments to employees in prior tax years in connection with the discontinuance of a plant or operation, a reduction in force, or other similar condition should consider filing a protective refund claim with regard to the FICA taxes paid on the severance payments. The separation from employment can be either temporary or permanent. With regard to future downsizings, taxpayers should follow the same approach Quality Stores, Inc. took — pay the employer portion of the FICA taxes, withhold and remit to the government the employee portion of the FICA taxes, and file a claim for refund.