Severance pay is generally taxable income to the recipient; however, the FICA treatment of severance payments has typically been a subject of contention between the taxpayers and the IRS. In general, both the employer and the recipient incur FICA taxes related to severance payments.
Recently, the Sixth Circuit US Court of Appeals upheld a Michigan district court case that certain severance payments are not subject to FICA [In re Quality Stores, Inc., No. 10-1563 (6th Cir. Sept. 7, 2012)]
As a result, employers that have made severance payments related to reductions in work forces may have the opportunity for a refund of the FICA taxes they incurred related to those payments. You should note the Federal Circuit has reached a contrary result. In view of these conflicting decisions and given the potential amount of revenue involved, the IRS may appeal the current case to the Supreme Court.
If you are headquartered in the Sixth Circuit (Michigan, Ohio, Kentucky, and Tennessee) and have paid or received supplemental unemployment compensation benefit (SUB) payments, you should review whether FICA taxes were remitted on those payments. You may request refunds for those amounts based on this decision.
If you are headquartered outside of the Sixth Circuit and have paid or received SUB payments, you should consider whether you might benefit from filing a protective claim for refund. Payroll tax years 2009 and forward are still open for such claims. By filing a protective claim, should a taxpayer in your jurisdiction prevails, or if the IRS acquiesces to the Quality Stores decision at a later date, your refund claim for otherwise-closed tax years will be preserved. (Randall A. Denha, Esq., Denha & Associates, PLLC, 255 S. Old Woodward Ave., Ste. 310, 248-265-4101, firstname.lastname@example.org)