Today, the Supreme Court hears arguments in the United States v. Quality Stores. The respondent is a company that declared bankruptcy in 2001. At issue is whether severance payments are subject to payroll taxes.
Severance is considered compensation, so it is subject to income tax. This case deals with about a million dollars worth of payroll taxes — what are called FICA taxes.
“It is the taxes that the federal government imposes to fund Social Security and Medicare,” explains Sean Anderson, a lecturer at the University of Illinois.
So are severance payments wages? Alan Viard, a fellow at the American Enterprise Institute, says that is at the heart of this case: “A vagueness, I guess, that is built into the definition of what it means for something to be remuneration for employment.”
Quality Stores says severance payments don’t amount to wages, because the recipient has been let go. The Obama administration disagrees, noting that, if it loses, the government would owe money to employees and companies beyond Quality Stores to the tune of $1 billion.
“A billion dollars, of course, sounds like a lot of money, and it is a lot of money,” says Bill Gale, a fellow at The Brookings Institution. “But not in the context of the federal budget.”
This is another ambiguity in a tax code that is now more than 70,000 pages long.
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