Your company hit tough times and you had to discontinue certain parts of your business and let employees go. You made severance payments.
If so, you may be entitled to a refund from the Internal Revenue Service. Have a look at your figures: If you paid Federal Insurance Contributions Act employment taxes (taxes that help pay for Social Security and Medicare) on the severance pay, consider this: In the case of United States v. Quality Stores, the Sixth Circuit Court of appeals reaffirmed a lower court decision that severance payments qualifying as supplemental unemployment compensation are excluded from the IRS’s statutory definition of “wages” and therefore aren’t subject to the tax. (If you withheld FICA, the former employees may also be subject to a refund, but that’s another story altogether.)
Chances are the issue will come before the Supreme Court, since it’s been in dispute for years – and because the most recent decision is at odds with rulings in other appeals court.
The 6th Court judges were aware of the split – and the conflict it was causing.
"We acknowledge that this issue of statutory construction is complex and that the correct resolution is far from obvious," wrote Judge Jane Stranch in the court's opinion. "While the Supreme Court may ultimately provide us with the correct resolution ... only Congress can clarify the statutes concerning the imposition of FICA tax."
Law firm Miller Chevalier has been advising clients to continue paying FICA until it’s known whether a Supreme Court review will occur.
And keep in mind that if you’re filing for a refund – which the firm says you may want to consider – you’ll need to do it before the three-year statute of limitations expires. So if you paid the taxes in calendar year 2009, the three-year period for you to file for a refund expires on April 15, 2013. (You can decide later about filing a refund for later years.)
If you already filed and the IRS denied your claim, you have two years to file a refund action either in the U.S. District Court or the U.S. Court of Federal Claims. If the deadline is fast approaching for you, the firm has been recommending filing a Form 907, “Agreement to Extend the Time to Bring Suit,” with the IRS.