Employers are Required to Withhold FICA Tax from Severance Payments

On March 25, 2014, in the case of United States v. Quality Stores, Inc., the U.S. Supreme Court determined that severance payments are considered “wages” under the Federal Insurance Contributions Act (FICA) and therefore, employers are required to withhold FICA tax from such payments.  It is important to note that this decision addressed severance payments that were not tied to state unemployment insurance benefits.   At present, IRS rules provide that severance payments conditioned upon certain unemployment benefits are exempt from FICA tax.