There has been some discussion regarding the designation of severance pay for tax purposes. Is it considered compensation? The Supreme Court of the United States is hearing a case to determine if a severance payment made to an employee upon termination of employment should be considered compensation subject to FICA and Medicare taxes. If found not to be compensation, then such payments are not subject to FICA and Medicare taxes and an employer is not obligated to withhold such taxes or pay the employer’s share of those taxes.
Further, any such taxes paid by an employee or an employer on previous severance payments would be subject to a claim for refund, which must be filed within three years of filing the applicable income tax return. For instance, a refund claim for taxes paid on severance received in 2010 (and included with the April 15, 2011 tax return) would need to be filed by April 15, 2014. If no ruling has been issued by the Supreme Court by April 15, 2014, a protective claim for a refund can be filed. Failure to do so would mean forfeiture of the claim no matter how the Court ultimately rules. Please contact the Benenati Law Firm or your CPA if you need more information.