Severance pay subject to FICA tax?

There is currently a big controversy over this issue. According to Bill Roos, EA, the answer depends in a large part, on the makeup of the severance payment. Some types of severance payments are not subject to FICA withholding and the problem arises when the payments are paid in one check. By not bifurcating the payments into two checks, the entire amount becomes subject to FICA withholding.

Bill suggests, if you have access to RIA’s Checkpoint, you can follow the series of developments in the Federal Taxes Weekly Alert Newsletter. Enter “severance pay” in the search box. If you want to study the court cases, the following are the key ones you should look at:

• Donnel, 88 AFTR 2d 2001-5940
• CSX Corp v. U.S., (Ct of Fed Cl 4/1/02) 89 AFTR 2d 2002-1935
• U.S. v. Quality Stores, Inc., (DC MI 2/23/2010) 105 AFTR 2d 2010-533

For more helpful information on individual income tax issues, download your free copy of the Federal Tax Update: Part 1 Q&A document offered by CPE Link. As additional questions and answers are added, the document will be updated. Those who have downloaded the original document will receive all updates automatically.

Got questions?
If you have more questions and would like to continue to participate in the discussion, visit CPE Link’s Discussion Forum. Log into your Facebook account to post a question.

 

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by Sue Anderson - Based on 30 years of experience in continuing education for accountants. Currently program director for online CPE provider, CPE Link. Formerly with the California CPA Education Foundation managing key operational areas including marketing, program development, and distance learning.

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