The United States Supreme Court recently clarified employers’ obligations with respect to FICA withholdings from severance payments, holding that such payments are taxable wages under the Federal Insurance Contributions Act, 26 U.S.C. § 3101, et seq. The court had granted certiorari in U.S. v. Quality Stores, 134 S.Ct. 1395 (2014), due to a split in authority among various circuit courts.

Attorneys who represent clients in various employment-related disputes often must consider the tax implications of severance payments and settlement agreements. Although Quality Stores presents a narrow issue, as will be discussed in more detail below, the issue it did not address was what impact, if any, it would have on the following, albeit relatively common scenario in the employment law world: Employer terminates Employee for performance-related issues but offers a severance agreement, the primary purpose of which is to obtain a release of the right to sue. Employee counters by raising allegations of wrongful employment practices, e.g., discrimination, whistleblowing, etc. The parties negotiate the terms of the agreement, and ultimately a document is signed providing Employee with “severance” or some other monetary compensation in consideration for the waiver of legal claims. In this scenario, then, is the severance agreement really a settlement agreement, and would these payments constitute “wages” under the Quality Stores decision?

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