The circuit courts have been split for years on this issue, which has led to uncertainty on the part of employers as to whether they should be withholding and paying the employment taxes.
At issue is the treatment of severance pay. Employers regularly withhold on pay that is in return for services performed. The question is whether severance pay is a result of services performed by the employee. In CSX Corp v. United States, the Federal Circuit said that payment of severance in a downsizing effort was subject to employment taxes. In United States v. Quality Stores, the Sixth Circuit found that severance pay was not wages for employment tax purposes.
After the announcement, the IRS suspended administrative refund claims to employers of $127 million from about 800 employers in the Sixth Circuit.
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