The Sixth Circuit has split with the Federal Circuit in ruling that severance payments paid to employees pursuant to an involuntary reduction in force are not “wages” for FICA tax purposes.   United States v. Quality Stores, Inc., Case No. 10-1563 (Sept. 7, 2012) (PDF).   The Court first confirmed that neither the Federal Insurance Contributions Act (“FICA”) nor the Treasury Regulations  expressly exclude or include severance payments resulting from downsizing  as “wages” for FICA purposes.  The Court then turned to the Internal Revenue Code’s income tax withholding provisions in § 3402(o) and asked whether the payments qualified as “wages” under that provision.  Here, the Court expressly disagreed with the Federal Circuit’s reasoning in CSX Corp. v. United States, 518 F.3d 1328 (2008) and held that Congress did not consider these payments to be “wages” for purposes of income tax withholding.   

Given the clear Circuit split, the government  may seek further review either through rehearing or appeal in this case.  Until the issue is resolved, employers should consider filing any potential refund claims prior to the statute of limitations for seeking the refund expires.