Are Severance Payments Taxable in California?
What and how can you be taxed on severance payments?
Are you aware of how you can be taxed on severance payments? The termination of your employment makes a significant difference.The sixth circuit court, in the case of United States vs. Quality Stores, decided that severance payments made to involuntarily terminated employees due to layoffs or reduction in workforce are not to be considered wages and therefore not to be taxed for the purposes of FICA.
However this decision is in direct conflict withCSX Corp. v. United States, 518 F.3d 1328, 1344 (Fed. Cir. 2008), where the decision was in favor of the United States and made the assertion that these payments were in fact wages and as such should be taxed accordingly.
We should expect to see a request made by the government for 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:
• Paid to an employee
• Paid pursuant to an employer plan
• Paid as the result of an employee’s involuntary separation from employment
• Paid as the result of a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and 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.
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