The 6th Circuit recently ruled that supplemental unemployment compensation benefits ("SUB payments") made to employees under an involuntary RIF are not wages for FICA tax purposes, even though they are treated as wages for purposes of federal income tax withholding.
The court's analysis was based largely on the fact that Congress specifically amended the "wage" definition for federal income taxes to include SUB payments but did not amend the wage definition for FICA purposes in a similar manner. Therefore, the court found that the severance payments (which are considered SUB payments under the Internal Revenue Code) made by the employer to its former employees are not subject to the FICA tax.
The court stated that it did not agree with the IRS or a Federal Circuit decision that SUB payments constituting "dismissal pay" are subject to the FICA tax. The court did, however, note that the U.S. Supreme Court ultimately may have to resolve the issue. In light of the 6th Circuit's decision, the IRS recently filed a petition for a rehearing before the full panel of the court. Until the IRS's petition for rehearing is resolved, the case cannot go before the Supreme Court.
Employers that have paid FICA tax on severance payments as a result of a RIF should consider filing a claim for a refund before the statute of limitations expires. Under the Internal Revenue Code, the statute of limitations for FICA taxes paid in 2009 generally expires on April 15, 2013.
Originally published on the Employer's Law Blog
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