Taxes Blog

Finance Blogs » Taxes Blog » High court to weigh severance taxes

High court to weigh severance taxes

By Kay Bell ·
Thursday, October 3, 2013
Posted: 3 pm ET

The almost 800,000 federal workers who have been furloughed because of the government shutdown are getting lot of attention, but they aren't the only Americans out of work.

Around 4 million people received unemployment benefits the week that ended Sept. 14, the latest data available. While the Bureau of Labor Statistics doesn't break out how many of these folks get severance packages, those who did most likely paid Social Security and Medicare taxes, also known as Federal Insurance Contributions Act, or FICA, taxes on that final company income.

Sharing FICA taxes

FICA taxes are split by employers and employees. Each pays 6.2 percent, for a 12.4 percent total, of each worker's earnings toward Social Security. Another 1.45 percent per employer and employee, for a total of 2.9 percent in Medicare taxes, also is withheld. Overall, 15.3 percent from workers and their companies goes to FICA.

Last September, a federal appeals court agreed with Quality Stores that it should get refunds from the Internal Revenue Service for the bankrupt company's FICA payments on the severance payments made to workers it laid off. Quality Stores also asked on behalf of its former workers for FICA refunds on their behalf.

The 6th U.S. Circuit Court of Appeals decision was diametrically opposed to another appellate decision in 2008 in which the railroad group CSX Corp. was found liable for FICA tax on severance.

Now the final word on FICA and severance packages will come from the U.S. Supreme Court. The high court has agreed to hear oral arguments on the Quality Stores case during its coming term, which starts Oct. 7.

Tax and retirement implications

Court filings in the Quality Stores case say that the IRS now has more than 2,400 FICA refund claims totaling more than $1 billion. If the high court agrees that severance money is not wages as far as federal taxes are concerned, those numbers will increase.

In addition, argues the Department of Justice, the decision will have significant implications outside the tax context with regard to the administration of Social Security and Railroad Retirement Act benefits. A payment's designation as wages affects whether employees earn wage credits and that affects the amount of retirement benefits that employees eventually will receive.

Want the latest news on taxes, tax reform prospects, filing deadlines, political fights, Internal Revenue Service alerts and tax-saving tips? Subscribe to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter: @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
Thomas S Groth
October 03, 2013 at 4:27 pm

Great. I always love a supreme court tax case.