Taxes on Severance Pay

Clare · March 2003

An accountant for a former employee, who was paid severance pay, has told us that in mid-2002, the IRS was involved in a tax court case (CSX 2002-1, USTC 50,337) related to certain payments made by employers which may also qualify as supplemental unemployment benefits. At issue was whether or not those payments were subject to Social Security and Medicare taxes. The tax court ruled against the IRS and held that qualifying payments were not subject to Social Security or Medicare taxes. Even though the IRS has appealed the case, it is the accountant's opinion that we should file a claim for a refund.

The former employee has requested a refund of Social Security and Medicare taxes withheld on severance pay. I would like to know how other employer's have handled this. Thanks in advance for your assistance.

Jax · March 2003

I have always taxed severance pay, just as salary. This is news to me.

LindaS · March 2003

When I was handling payroll I taxed any severance the same as any other salary.

Terri · March 2003

I will be doing a severance check in a few days. Hopefully, someone out there has a correct answer. I had planned to deduct all taxes. However, now I am unsure...........

Clare · March 2003

I have tried to contact the accountant who provided this information to our former employee requesting some documentation by the IRS to confirm this opinion. I have not received a reply. I will contact the former employee and tell them we will request a refund only if he can provide IRS documentation. I will post again if I learn anything conclusive. Thanks for the responses!

Clare · March 2003

I just talked with the accountant who gave out the advice regarding withholding Medicare and Social Security on severance payments. He suggested that we wait until the courts make a final decision before we request any refund. This will be a wait and see situation, but it sounds like in the meantime, no change in what we are doing.

E Wart · March 2003

THis is very interesting and news to me. One thing I wondered... in some states you can't begin drawing unemployment until severance is over. Others, you can "double dip" draw both at the same time. I wondered if this would make any difference as to this situation you were speaking of.

Rockie · March 2003

>THis is very interesting and news to me. One thing I wondered... in
>some states you can't begin drawing unemployment until severance is
>over. Others, you can "double dip" draw both at the same time. I
>wondered if this would make any difference as to this situation you
>were speaking of.

I found this out recently when we paid a severance package. Our package included paying the severance out every two weeks, the same as if they were on the payroll(employee's request) and continuing their health insurance. Employee filed for unemployment and was granted the unemployment. I contacted the UI Commission and they told me that severance was considered a "gift" and the employee was still eligible for unemployment. (A real incentive to go out and find a job huh?)

Mary N · March 2003

I have not run into this before but if the ruling holds it certainly will have a significant impact.

I did a little research on the web on the issue and discovered a brief article that discusses this issue. It seems to apply to RIF severance situations not to individual severance issues. I have listed the site if you are interested in reading the article. If does mention the potential of it being overturned.
[url]http://www.leonard.com/newsletters/compbene10_2002/Severance_Pay.pdf[/url]

Taxes on Severance Pay

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