[author: Matthew Richardson]

In a recent case, United States v. Quality Stores, the Sixth Circuit ruled that certain severance payments paid to involuntarily terminated employees pursuant to an employer’s reduction in workforce are not “wages” for FICA tax purposes. This decision creates a conflict in the circuits, as the Federal Circuit, in CSX Corp. v. United States, 518 F.3d 1328, 1344 (Fed. Cir. 2008), previously held in favor of the government’s position that such payments are “wages” subject to FICA taxes. The government is likely to request a rehearing or petition for certiorari to the Supreme Court.

The payments at issue were “supplemental unemployment compensation benefits” (SUB payments), which are defined in the Internal Revenue Code as payments that are (i) paid to an employee, (ii) paid pursuant to an employer plan, (iii) paid as the result of an employee’s involuntary separation from employment, (iv) paid as the result of a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and (v) includible in the employee’s gross income. For income tax withholding purposes, SUB payments are not treated as “wages,” but nevertheless are made subject to income tax withholding. However, for FICA tax purposes, the Internal Revenue Code does not explicitly address whether SUB payments are “wages” or are otherwise subject to FICA taxes.

Although employers outside the Sixth Circuit should continue to withhold FICA taxes from similar SUB payments, they may be advised to consider filing protective claims for refunds of the FICA taxes withheld to preserve the statute of limitations.