The Supreme Court ruled on March 25 that severance payments made to employees who have been terminated are wages subject to FICA taxes (social security and Medicare). A lower court had previously ruled that payments made by Quality Stores to terminated employees upon entering bankruptcy were not wages and, therefore, not subject to FICA taxes.
The Court took a two-step approach, first examining whether the term “wages” for FICAP purposes encompassed severance payments. They found that wages are defined broadly to include all remuneration paid as a part of employment. Further, they stated that service as an employee encompasses the entire employee/employer relationship and that severance payments are includable as wages.
In the second step, the Court examined the meaning of wages for FICA purposes. Quality Stores had argued that the heading of Sec. 3402(o) limited the meaning of wages in stating “Extension of withholding to certain payments other than wages.” The Court rejected this argument stating that the history behind this section of the Code was intended to solve a limited problem involving withholding in relation to certain unemployment benefits and was not to narrow the definition of wages.
Therefore the court declared that severance payments made to employees is considered wages subject to FICA taxes.