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Severance Payments are Taxable under Federal Insurance Contribution Act (FICA)

On Tuesday, March 25, 2014, the U.S. Supreme Court ruled in favor of the Internal Revenue Service in a dispute over the payroll tax treatment of certain types of severance compensation.  The justices, in an 8-0 vote, overturned the Sixth Circuit’s opinion in Quality Stores, Inc., which had held that severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (so–called “supplemental unemployment compensation benefits”) is not subject to tax under the Federal Insurance Contribution Act (FICA).

The stakes in the case were huge because, if Quality Stores, Inc. had won, thousands of additional tax refund claims would likely have resulted, with a total cost to the government of as much as $1 billion.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume IV, Number 87
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About this Author

D. Matthew Richardson, Tax and Estate Lawyer, Sheppard Mullin
Partner

D. Matthew Richardson is a partner in the Orange County and Los Angeles offices, a member of the Tax and Estate Planning Practice Group. 

Areas of Practice

Mr. Richardson specializes in mergers and acquisitions, corporate reorganizations, liquidations and spin-offs, complex financing, debt restructuring, real estate taxation, joint ventures, partnerships and limited liability companies. He regularly counsels early-stage technology and other businesses with respect to various formation, operation and taxation issues.

Mr. Richardson also specializes in...

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