By DJ Berry
In general, severance pay has always been treated like any other wages, with FICA taxes being paid based on the severance pay. A recent court case states that severance pay deemed to be “supplemental unemployment compensation benefits” (SUB) should not be treated as wages subject to FICA taxes. SUB wages are typically considered as those payments made by an employer for several reasons, all related to an employee’s involuntary separation from employment: 1)resulting directly from a reduction in force; 2)the discontinuance of a plant or operation; or 3)other similar conditions.
What does this mean?
If you are an employer, and you made severance payments to employees because the company was doing poorly and needed to reduce the workforce, or you shut down an operation and released employees who worked in the operation, or anything similar that involved a reduction in the workforce and severance payments, it is very possible that you didn’t need to pay FICA taxes for the employer’s portion of these severance payments.
Why is this important now?
This court decision is based on the 2010 tax year. By IRS law, if a taxpayer wants to amend a payroll tax return, the taxpayer has three years from the date the return was due (or filed, whichever is later) to file the amended return. For 2010 returns, this date is generally going to be April 15, 2014.
What should I do?
First, consider if you made any severance payments to employees during 2010. If the answer is yes, check and make certain you paid the employer’s share of FICA taxes on the severance payments. If the answer to both of these questions is yes, call the tax specialists at BCS and see if the payments could qualify as SUB payments. Now is the time to file a protective refund, before the statute of limitations expires.