Severance Payments are Subject to FICA Taxes


By: Jonathan Kandel  

                Many companies offer terminated employees severance packages.  This is true whether the employee is terminated as part of a layoff (or reduction in work force) or for other reasons.  Earlier this week, the U.S. Supreme Court ruled in United States v. Quality Stores, Inc. that severance payments are taxable wages under FICA (Federal Insurance Contributions Act).
Under FICA, all “wages” paid by an employer or received by an employee “with respect to employment” are taxed to fund Social Security and Medicare benefits.  “Wages” is defined very broadly in FICA as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”
As a result of the Court’s decision, severance payments must now be reported as wages on W-2 forms and employers must pay their share and withhold the employee’s share of the FICA tax.  Similarly, many people don’t realize there is individual liability under FICA for certain “responsible parties” if an employer fails to pay withheld FICA taxes.