Supreme Court Decides Severance Not Exempt From FICA

Executive Summary: On March 25, 2014, the United States Supreme Court unanimously held that certain severance payments (described as "supplemental unemployment compensation benefits" or "SUBs") constituted taxable wages for purposes of FICA. See United States v. Quality Stores, Inc. No. 12-1408 (2014). The Sixth Circuit had held that the payments were not wages subject to FICA, in a decision from which the IRS appealed. See In re Quality Stores, Inc., 693 F. 3d 605 (6th Cir. 2012).

The Federal Circuit had previously held that similar payments were wages for purposes of FICA, in CSX Corp. v. United States, 518 F. 3d 1328 (Fed.Cir., 2008). The Sixth Circuit decision created a conflict that needed to be resolved by the Court.

The Supreme Court's decision was primarily based upon the actual definitions contained in the Internal Revenue Code, specifically sections 3121(a) and (b), which define the terms "wages" and "employment," respectively, for FICA purposes, as well as prior Court decisions such as Social Security Board v. Nierotko, 327 US 358 (1946) (holding that "service" includes not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer) and Rowan Cos. v. United States, 452 US 247 (1981) (holding that "wages" should generally be defined the same way for income tax withholding and for FICA purposes). The Court also rejected the taxpayer's argument that section 3402(o) of the Code, which provides that "supplemental unemployment compensation benefits" are treated for income tax withholding purposes "as if they were wages," means that they are not wages; rather, the Court found that section 3402(o) was enacted in order to deal with a specific income tax issue, and did not affect the payments' characterization for purposes of FICA.

The Court's decision, written by Justice...