The U.S. Supreme Court’s recent decision in United States v. Quality Stores, Inc., No. 12-1408.,188 L. Ed. 2d 413, has broader implications for employers than its legal holding.
On its face, the holding is that supplemental unemployment compensation benefits paid to terminated employees after a reduction in force or closing of an operation are subject to U.S. social security (FICA) taxation, even if those payments otherwise are exempt from income tax withholding.
That result alone is not an earth shaker. The broader implication for employers is found in the Supreme Court’s rationale, which was expressed in a rare unanimous opinion.
Quality Stores tried to argue that the payments should not be considered “employee” wages that are subject to FICA tax because they were made after termination of employment. The Supreme Court flatly rejected that argument, essentially relying on a simple rationale that payments to former employees have the employment relationship as their genesis.
In years past, this type of issue has come up in a variety of contexts. In various circumstances, employers have taken, and may currently be taking, positions that certain types of employee-related payments are not subject to FICA tax (e.g. contract terminations or signing bonuses). If so, employers should revisit those positions.
Similarly, going forward, employers will need to be very skeptical of taking any type of tax position that would exclude employee-related payments from FICA taxation.