When an employer terminates an employee, they often provide what is called “severance pay” or “severance payments.” These one-time payments are usually meant as a goodwill gesture to help the employee deal with the stress and financial losses of losing a job. Severance payments are especially common among larger employers. In September, 2012, the Court of Appeals for the Sixth Circuit concluded that severance pay per an involuntary layoff was not subject to FICA employment taxes (often known as Social Security taxes). As you probably know, employers pay a portion and employees pay a portion of the FICA taxes.

The Supreme Court and FICA Taxes

Employer / Employee and FICA TaxesNow the Supreme Court is scheduled to weigh in on this important tax issue. If you receive severance pay, will you (and/or your employer) be subject to the FICA taxes, or not?  This also relates to the issue of unemployment benefits… again, there is a lot of confusion about whether these should, or should not, be subject to FICA taxes.

In this interesting case, employers and employees are on the “same side,” arguing that severance payments should not be subject to FICA. We’ll see how this turns out when the Supreme Court rules.

Employer, Employee and Tax Issues in San Francisco

Whatever side you are on – employer or employee – there are many creative things that can be done with various remunerations, not just severance but things like employee stock options. Many San Francisco Bay Area employees are receiving stock options as compensation, and if you consult with a tax professional, he or she can help you minimize the tax implications. So however you are being compensated, and for whatever reasons, be sure to consult with a tax advisor.

And keep an eye on the Supreme Court!