Supreme Court to Decide Contested Payroll Tax Issue

The U.S. Supreme Court has finally agreed to resolve a matter that has perplexed payroll managers for years. In the case, involving a large retail chain, the Sixth Circuit Court of Appeals held that severance payments should not be treated as wages for payroll tax purposes, but the ruling conflicts with other federal courts. Now, the nation’s top court has granted certiorari to review this matter.

 

Supreme Court to Decide Contested Payroll Tax Issue

At long last, the U.S. Supreme Court has agreed to resolve a matter that has perplexed payroll managers for the last few years. In the controversial Quality Stores case, the Sixth Circuit Court of Appeals ruled in 2012 that severance payments should not be treated as wages for payroll tax purposes, a conflicting decision with other federal courts. However, the IRS refused to throw in the towel.

Now, the nation’s top court has granted certiorari to review this matter. It is expected to provide a clear path to follow in the future (U.S. v. Quality Stores, CA- 6 09/07/2012, 110 AFTR2d 2012-5827, cert. granted 10/01/13).

Background Information

Federal payroll taxes are a requirement for both employees and employers. For 2013, an employee must pay FICA tax of 6.2 percent for Social Security and 1.45 percent for Medicare on wages up to the “Social Security wage base” of $113,700. (For 2014, the amount is $117,000.) Once an employee reaches the wage base, he or she must only pay 1.45 percent because there is no limit for Medicare tax. The employer must also pay its corresponding share of these payroll taxes. The wage base is indexed annually.