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Severance payments are not subject to F.I.C.A tax according to U.S. v. Quality Stores, Inc., February 23, 2010. While the IRS is likely to appeal, businesses can file protective refund claims back to 2006 to maximize refunds not subject to statue of limitations.

Since unemployment benefits are not considered earned income they are not subject to FICA tax so it isn’t unreasonable that severance would be treated this way. The court actually ruled that since tax law specifically states that severance payments must be subject to must be treated as wages for income withholding purposes, severance payments are not wages. Otherwise a specific law would not be necessary if severance payments were wages.

Employers can file protective refund claims using form 941-X using these instructions.

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