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Severance Payments Ruled Subject To Payroll Taxes



The IRS has long held that severance payments from an employer to an employee are wages. As such, they are subject to income, as well as payroll taxes that include social security and Medicare. In a 2014 case (U.S. vs. Quality Stores) a Michigan court ruled otherwise – that social security and Medicare taxes are not due and payable on severance payments. The Sixth Circuit Court of Appeals, surprisingly, upheld the lower court ruling.

This ruling put the IRS in a bind. If the ruling were to stand and be applied nationwide, hundreds of millions of dollars could be at stake. Indeed, in a matter of months, over 3,000 claims for payroll tax refunds were filed with the IRS. All of these claims were disallowed if not coming from the Sixth Circuit. The IRS then appealed to the United States Supreme Court.

On February 9, 2015, the Supreme Court reversed the Sixth Circuit Court of Appeals decision, holding that severance payments are wages for payroll tax purposes. The court did construct a very narrow exception in cases where the payments may be linked to state unemployment benefits. Therefore, many companies who were dreaming of a huge tax windfall have had their hopes dashed. The IRS will disallow all claims for refunds of payroll taxes on severance payments that are outside the criteria laid down by the Supreme Court.

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Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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