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Are Severance Payments Taxed by the Feds?

Apr 22, 2015

Are Severance Payments Taxed by the Feds?

By: Craig T. Watrous

With tax season just behind us we thought it worthwhile to post a question that comes up regularly with regards to employment termination and severance packages.  Are severance payments taxed?

There is often some confusion because under Colorado law severance payments are not considered "wages"; however, under federal law, supported by the March 25, 2014, ruling by the U.S. Supreme Court in United States v. Quality Stores, Inc., the Court unanimously overturned a lower-court decision and held that severance payments made to involuntarily terminated employees are “wages” subject to Federal Insurance Contributions Act (FICA) taxes.  Not surprisingly, the IRS has been fighting for severance payments to be treated as wages for years.  See links to some relevant articles below:

http://www.adp.com/tools-and-resources/adp-research-institute/insights/insight-item-detail.aspx?id=8DC59D62-27E3-41F6-A0B4-62F6963CEC95

http://www.forbes.com/sites/ashleaebeling/2014/03/25/supreme-court-says-fica-tax-due-on-severance-pay/

 






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