United States v. Quality Stores, Inc.
Headline: Court rules severance payments to involuntarily terminated workers are taxable payroll wages under FICA, limiting refunds and increasing payroll tax obligations for employers and some former employees.
Holding: The Court held that severance payments made to employees terminated against their will, not tied to state unemployment benefits and varying by seniority, fall within FICA’s broad definition of wages and are taxable payroll earnings.
- Makes many severance payments subject to Social Security and Medicare payroll taxes.
- Requires employers to treat and withhold FICA taxes on non-unemployment-linked severance.
- Reduces chances for FICA refund claims for affected former employees.
Summary
Background
An agricultural retail company called Quality Stores laid off thousands of employees after bankruptcy. The company paid severance under two different plans that varied by job level and length of service. Those severance payments were not tied to state unemployment benefits. Quality Stores reported the payments as wages, paid FICA taxes, sought refunds for many former employees, and won in the lower courts. The Government appealed to resolve a split among appeals courts about whether severance pay counts as FICA wages.
Reasoning
The Court examined the FICA statute and its broad definition of “wages” as all remuneration for employment. It found severance payments here are remuneration paid to employees for their employment, often varying by seniority or job level. The Court rejected the company’s argument that a separate income-tax withholding rule (§3402(o)) meant severance payments were not wages for FICA. The Court explained that §3402(o) was enacted to solve a narrow withholding problem and does not narrow FICA’s broad wage definition. The opinion relied on regulatory history and a prior decision emphasizing consistent treatment of wages for withholding and FICA.
Real world impact
The Court held these kinds of severance payments are taxable wages under FICA. That means employers who pay similar severance must treat such payments as subject to Social Security and Medicare taxes, and many refund claims may be defeated. The opinion does not address severance payments that are tied to state unemployment benefits under separate IRS rulings, which remain outside this decision.
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