Taxes on Severance Payments Draw U.S. High Court Review
The U.S. Supreme Court agreed to consider whether companies and employees must pay Social Security taxes on severance compensation, accepting a case that may force the Treasury to give billions of dollars in refunds.
The justices today said they will hear the appeal from President Barack Obama’s administration in a case involving Quality Stores Inc., once the country’s largest agricultural specialty retailer.
The issue has grown in importance with the layoffs that have accompanied the economic slowdown over the past five years. The administration says that more than 2,400 refund claims, seeking more than $1 billion, are already in the pipeline and that those figures will increase.
The question for the Supreme Court is whether severance payments qualify as “wages,” making them subject to tax, under the Federal Insurance Contributions Act. That law uses payroll taxes to finance Social Security and part of the Medicare health-care program for the elderly and disabled.
The administration contends the law, known as FICA, defines “wages” broadly to include compensation for services of any type. The Quality Stores payments “provided compensation to employees for service that those employees had rendered,” argued U.S. Solicitor General Donald Verrilli, the administration’s top Supreme Court lawyer.
Quality Stores, which had sales of $1.1 billion in 2000, closed more than 300 stores in 2001 and 2002 and fired its remaining employees. The company, which was based in Muskegon, Michigan, made severance payments to 3,100 people.
The company paid the disputed taxes and then sought a $1 million refund. Some of that money would go to 1,850 former employees who paid their share of the FICA tax and authorized Quality Stores to seek refunds on their behalf.
Employers and employees each pay 6.2 percent in Social Security taxes on wages up to a cap, which is $113,700 this year. Employers and employees each pay 1.45 percent of all wages toward Medicare; high-income taxpayers are subject to additional payroll levies.
Quality Stores contends that the payments represented supplemental unemployment compensation, not wages. The payments “are not made for employment but rather for the elimination of employment,” Quality Stores argued in court papers.
Lower courts are divided on the issue. A Cincinnati-based federal appeals court said Quality Stores was entitled to a refund.
The court will hear arguments early next year and rule by July. The case is United States v. Quality Stores, 12-1408.
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