Downsizing by companies has been a fact of life over the past several years. As a part of this process companies may have paid severance payments to employees who were involuntarily terminated due to either: (1) reduction in force (“RIF”) initiatives or (2) plant closings or other similar conditions.
Historically the IRS has argued that such payments are subject to FICA tax withholding in addition to income tax withholding at the time of payment. In 2002, the Court of Federal Claims in CSX Corp v. U.S. held that severance payments made by CSX were not subject to FICA tax and thus CSX was entitled to refunds of amounts previously withheld. The IRS appealed and in 2008 the Court of Appeals for the Federal Circuit reversed the Court of Claims holding that such payments were subject to FICA tax. (more…)