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If the SUB payments made by Quality Stores here (and severance payments more generally) are “wages” under the plain meaning of FICA, then how can the IRS continue to exempt from wages those SUB payments that happen to be tied to state unemployment compensation? In a thinly veiled warning to the government, the Court noted that “those Revenue Rulings are not at issue,” and that “[b]ecause the severance payments here were not linked to state unemployment benefits, the Court does not reach the question whether the IRS’ current exemption is consistent with the broad definition of wages under FICA.” Those Revenue Rulings may now be vulnerable, especially given the Court’s broad reading of “wages” in Quality Stores.
The payments were not tied in any way to the receipt of state unemployment benefits – a matter to be discussed further below.Known for seven years as Deputy Chief of Staff Josh Lyman on The West Wing, Whitford says he knew that role would be hard to top. "That was an acting experience beyond my wildest dreams; it was about politics — something I'm passionate about. There was no question that the severance payments constituted income under the income tax, or that Quality Stores was required to withhold a portion of the payments for income tax purposes.The only issue was whether the payments constituted “wages” for purposes of the payroll tax imposed by FICA.The Sixth Circuit – affirming the judgments of the bankruptcy court and the district court – held that they were not, creating a split among the circuits.
Justice Kennedy’s unanimous opinion for the Court reversed that decision. § 3121(a), which defines the term “wages” under FICA. by an employee for the person employing him.” Given this definition, “and as a matter of plain meaning,” the Court concluded that severance payments constitute “remuneration for employment.” They are paid to employees (or former employees), and they are typically based on such factors as the employee’s function and tenure with the employer. shall be treated as if it were a payment of wages by an employer to an employee for a payroll period.” (Both the United States and Quality Stores stipulated that the disputed severance payments in this case constituted “supplemental unemployment compensation benefits,” also known as “SUB payments.”) The Sixth Circuit inferred from this provision that such payments were not actually “wages” for purposes of income-tax withholding, and that FICA necessarily embraced the same definition of wages as that for income-tax withholding.
As Justice Kennedy noted, the “beginning point” for the Court’s analysis was “the relevant statutory text” – namely, 26 U. Section 3121(a) states that wages are “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” Further, Section 3121(b) provides that “employment” encompasses “any service, of whatever nature, performed . In this way, they are “like many other benefits employers offer employees above and beyond salary payments,” such as “health and retirement benefits, stock options, or merit-based bonuses,” all of which plainly constitute “remuneration for employment.” In the Court’s view, two other bits of evidence confirmed this reading of the statute. retirement for disability.” This exemption would be unnecessary, Justice Kennedy explained, “were severance payments in general not within FICA’s definition of ‘wages.’” Second, not long after the Social Security Act was originally enacted, the Treasury Department promulgated a regulation stating that, for purposes of the payroll tax, “dismissal pay” constituted “wages.” In 1939, Congress overruled that regulation by statute, providing that wages did not include “[d]ismissal payments which the employer is not legally required to make.” But in 1950, Congress repealed that provision, plainly indicating its view that the term “wages” includes severance payments. § 3402(o) – captioned “Extension of withholding to certain payments other than wages” – states that “any supplemental unemployment compensation benefit paid to an individual . Closely tracking the arguments presented by the United States, the Court found this logic unpersuasive.
First, Section 3121(a)(13)(A) specifically excepts from the definition of “wages” severance payments that are made “because of . And Congress has done nothing to alter the relevant portions of FICA since. First, in directing all employers to treat SUB payments “as if” they were wages, Congress had not stated that all SUB payments were not wages.
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Joondeph is the Inez Mabie Distinguished Professor and Associate Dean for Academic Affairs at the Santa Clara University School of Law. But the Court’s affirmance in Lexmark was matched by a unanimous reversal in United States v. By a vote of eight to zero (with Justice Kagan recused), the Court held that the definition of “wages” for purposes of the Federal Insurance Contributions Act (FICA) includes severance payments made by an employer to its employees –or at least the type of severance payments made by Quality Stores in this case.
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