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HORNE Tax Alert

FICA Taxes on Severance Pay - What You Need to Consider Now

Over the past several decades, the IRS and courts have come to various conclusions on whether severance payments are subject to Federal Insurance Contributions Act (FICA) taxation. Most recently, a U.S. District Court in Michigan affirmed an earlier bankruptcy court decision holding that some types of severance pay are exempt from social security taxation under the FICA Act, and that the employer was entitled to a refund of FICA tax it had previously paid on the severance.

While the decision is certain to be appealed by the IRS, employers who have made significant severance payments in open tax years (generally 2006 or later) may want to consider filing protective claims for refund of FICA payments until the matter is resolved.

Claims for refund of FICA paid in 2006 generally must be filed no later than April 15, 2010.

Also, employers who have had refund claims denied by the IRS as a result of the Court of Appeals decision in CSX Corporation v. United States should consider appealing the IRS' decision or filing a refund suit.

Claims for refund of FICA generally must be filed no later than April 15 of the third year following the year in which the FICA is paid, which means that employers have until April 15, 2010, to file claims for a refund of FICA paid in 2006. Not all severance is potentially eligible for the FICA exemption under Quality Stores. The decision applies only to severance paid under a plan that covers involuntary terminations resulting from a RIF, plant closing, or similar conditions.

HORNE's tax team is ready to assist you with analyzing the application of this development to your facts and circumstances. Should you have any questions about the specifics of the case or the required filings for a protective claim, please contact your HORNE advisor or local office.