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
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