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Top Court rules on severance pay & taxes

April 7, 2014 --

bullard-law2By Bullard Law,
Portland law firm

Thomas Kramer,

Employers sometimes provide severance pay to departing employees, whether as part of a severance pay plan or policy, an individual separation agreement or to settle a dispute between the employer and the departing employee. While the recipient of the severance pay is a former, not current, employee, the payment is considered “wages” for Oregon and federal income tax and withholding purposes, and is reportable on IRS Form W-2 (not 1099 -MISC ).

Years ago, a dispute arose between employers and the Internal Revenue Service over whether severance pay also is “wages” subject to FICA (Social Security and Medicare) taxes and withholding. The Federal Circuit Court of Appeals in Washington D.C., agreeing with the IRS, held that severance pay is wages for FICA purposes. More recently, the Sixth Circuit Court of Appeals in Cincinnati, agreeing with an employer, Quality Stores, held that severance pay is not wages for FICA purposes. Notwithstanding the Sixth Circuit decision, we have generally advised employers to treat severance pay as wages for FICA purposes.

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