As all employers know, wages paid to employees are subject to required withholdings and deductions for income taxes and employee contributions to Social Security and Medicare (which is commonly referred to in shorthand as "FICA"). Employers must withhold 6.2% for Social Security on every dollar up to $113,700 (which tops out at about $7,000 a year), and 1.45% for Medicare (with no cap) from their employees' wages. In addition, employers must pay an equal amount to the government out of their own pockets, which means that every $100 in wages paid to an employee, actually costs the employer $107.65 – a real cost for large employers.
Most employers have typically interpreted their FICA obligations to extend to severance pay based on guidance from the IRS treating severance pay as wages. But that may change.
The U.S. Supreme Court recently agreed to hear a case from an employer challenging the IRS's position regarding severance, arguing that severance pay is not wages, but rather a supplemental unemployment compensation payment not subject to FICA.
An employer-friendly ruling would lower severance costs for employers in two ways. First, employers would no longer be required to make FICA contributions on any severance payments (bringing that $107.65 back down to $100.00). Second, employers may be able to seek refunds on previous severance payments. Accordingly, employers should consider filing protective refund claims so that they can keep the statute of limitations on refund claims open pending review by the Supreme Court. Employees may also file claims for refunds.
Stay tuned for updates on this (potentially) lucrative development. The Supreme Court will make its decision before next June following the end of the current term.
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