The U.S. Supreme Court is set to decide in 2014 whether severance payments are subject to Medicare and Social Security withholdings, a decision that could impact tax planners and business owners in the North Bay and beyond.
Those payments to terminated employees are already subject to a regular federal income tax for both employers and employees. Employees and employers are also subject to the Social Security and Medicare tax, a cumulative rate of 15.3 percent.
Yet courts have been split as to whether severance pay for involuntary termination of an employee counts as payment for employment services, which would put it in the same category as regular compensation.
It is among the tax questions that are looming in 2014, a year that tax experts in the North Bay have said represents a period of relatively stable transition after events like the so-called "fiscal cliff" in early 2013.
In a Nov. 18 newsletter, Rachel Harding and Martha Gonzalez of accounting firm Burr Pilger Mayer called the scheduled June hearing a "showdown," with corporations potentially entitled to refund claims for contributions made in tax years that are still open with the Internal Revenue Service.
The newsletter notes the split in the courts. The Sixth Circuit Court of Appeals last year found payments were not eligible for the tax, while the Federal Circuit Court of Appeals in 2003 found the opposite. The treatment remains uncertain, with the newsletter advising employers to continue withholding those tax payments yet to file a protective claim to allow revision for tax years back to 2010.•••
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