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Tax case puts spotlight on severance pay

The United States Supreme Court will hear a highly influential case having to do with severance payments for employees. Specifically, the case deals with the tax status of these payments and whether or not they are considered "wages" for purposes of the Federal Insurance Contributions Act (FICA) tax. FICA taxes fund Social Security and Medicaire.

these types of legal definitions can be confusing for many readers, so it helps to start with an understanding of what severance is exactly. Employees wind up with severance pay for a variety of reasons. In some cases severance is offered as a result of lay-offs due to budget cuts. In other cases severance is offered as a part of an agreement to end the employment relationship because of a hostile work environment, previous harassment, or other issues. Sometimes severance is offered as an alternative to a traditional lawsuit settlement. Severance pay can include compensation for the time it will take to find a new job, unused vacation, unpaid commission, or other things. 

The case that the Supreme Court will review has to do with severance payments made by a large retailer after the recession forced them to close their doors and layoff many workers. The retailer asked the IRS for a refund on the FICA taxes it paid out of those severance packages, saying that the payments were not wages that are subject to that particular tax. If the Supreme Court decides they are correct it could impact many employers who filed for tax refunds on this same issue during the recession. However, it will not impact the individual employees who receive severance payments. 

Source: Reuters, "Supreme Court to weigh taxability of severance pay," Lawrence Hurley and Patrick Temple-West, Oct. 1, 2013. 

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