In a unanimous decision, the Supreme Court (reversing the Sixth Circuit Court of Appeals) has held that severance payments that were made to involuntarily terminated employees were subject to tax under the Federal Insurance Contributions Act (FICA). The Court easily concluded that the severance payments at issue fell within Code Sec. 3121’s broad definition of “wages” for FICA tax purposes and rejected the taxpayer’s argument that the payments’ tax treatment was altered by a special withholding provision in Code Sec. 3402.
In reaching its first conclusion, the Court observed that Congress used extremely broad language in defining wages for FICA purposes and that, as a matter of plain meaning, severance payments clearly fall within that definition. In short, the Court found that severance payments were remuneration and that the employees received the payments for employment. With respect to the second issue the Court concluded that 3402(o) does not limit the definition of “wages” for FICA purposes.
It’s important to note, however, that the IRS still provides that severance payments tied to the receipt of State unemployment benefits are exempt from both income-tax withholding and FICA taxation. (See Rev. Rul. 90-72.) In this case, the severance payments were not linked to State unemployment benefits and so the Court did not address whether the IRS’s current exemption is consistent with the broad definition of “wages”.