Employers may be eligible for a FICA tax refund for severance paid in prior years, pending U.S. Supreme Court’s resolution of Quality Stores case.
If you are an employer and you paid severance in 2010 or later years, then you may be eligible to file for a tax refund. Note that any tax refund claim related to 2010 must be filed by April 15, 2014. Thus, if you want to pursue a refund, it is important to check your severance payment history and move quickly to file protective claims with the IRS.
Background. When an employer pays severance to a departing employee, it is common practice for the employer to treat the entire amount as a “wage” payment, and withhold both income taxes and Social Security and Medicare taxes (commonly known as “FICA taxes.) The FICA taxes are 6.2% on a limited wage base (capped at $106,800 in 2010) and 1.45% on all wages. The total FICA tax is generally twice these amounts, because both the employer and employee pay it, although the employer is the withholding agent.
In 2001, an agricultural retailer named Quality Stores, Inc. declared Chapter 11 bankruptcy and then filed a tax refund claim for overpaid FICA taxes on a special type of severance pay known as supplemental unemployment compensation benefits (“SUB” payments). Quality Stores pursued a technical argument that its SUB payments were not a form of “wages” for FICA withholding tax purposes, and therefore it was entitled to a refund of all FICA taxes. This case has wound through a number of courts, most recently the U.S. Circuit Court of Appeals for the 6th Circuit, which ruled in favor of permitting the refund in 2012. In 2008, the U.S. Court of Appeals for the Federal Circuit previously reached the opposite conclusion. Now the Quality Stores case has been presented to the U.S. Supreme Court and a final decision is expected later this year, probably in the summer. If the Supreme Court rules in favor of the 6th Circuit, then tax refunds will be available. Also, it is not clear whether the refund benefit would apply narrowly to SUB payments only, or would extend more broadly to all kinds of severance payments. Given this uncertainty, it is prudent to file protective refund claims based on the assumption that the broader interpretation will carry the day.
Making an Initial Assessment. If you are employer and you paid any severance in 2010, then you should move quickly to determine whether a protective refund claim is appropriate. In rough numbers, the refund possibility would be approximately 2.9% multiplied by total severance payments made in 2010. The refund possibility is higher if any portion of the severance was also subject to Social Security withholding, which would have applied to the extent total wages in that year (per person) were less than $106,800. Under the statute of limitations, refund claims for calendar year 2010 must be filed by April 15, 2014.
Filing a protective refund claim involves a certain amount of hassle and administrative cost. In particular, the IRS has issued special rules about an employer’s obligation to its ex-employees. In general, the employer is required to give notice to the ex-employee about the refund if the employee’s share is part of the claim, and one-half of the amount recovered is potentially payable back to that person. An ex-employee also may have individual rights to pursue a refund against the IRS. The procedural aspects of filing and monitoring a claim are not simple. But numerous CPA firms, payroll companies and other service providers are now pursuing these cases in a coordinated fashion. Thus, many of the procedural obstacles will be common to all claims, and therefore an experienced service provider should be able to provide efficient help.
If you have questions about the law and procedure for filing a claim, you may contact Chris Brown at Summit Law Group, PLLC, at firstname.lastname@example.org, or at 206-676-7090.