The U.S. Supreme Court overruled a lower court decision and has decided in favor of the government on the issue of payroll taxes related to severance payments. The Court ruled severance payments are subject to medicare and social security taxes under FICA. In the case, Quality Stores Inc. was contending the payments were supplemental unemployment insurance and therefore should not be subject to FICA. However, the court disagreed with this analysis and found the payments to be taxable wages as stated in the opinion – “Under FICA’s broad definition, these severance payments constitute taxable wages.”
The decision was very crucial for the government. If the lower court decision was not overturned the IRS may have been forced to give more than $1 billion in refunds. What does this mean to the average taxpayer getting laid off, a situation not uncommon in today’s market? Overall, taxpayers are not going to see a new tax or new cost. FICA taxes are taken out of every paycheck you receive from your employer. On your W-2 you can see these amounts in boxes 4 and 6. Therefore, severance payments will be very similar to receiving an additional paycheck from your employer when it comes to these taxes.
The issue of payroll taxes continues to be a major point of emphasis for the IRS. The penalties for neglecting payroll taxes are severe and can sometimes lead to criminal prosecution or assessment against unsuspecting members of the business. If you have questions about your payroll tax obligations or issues, contact us at Hone Maxwell LLP today for a complete analysis of your case. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.