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U.S. Supreme Court Grants Certiorari to Consider FICA Taxation of Supplemental Unemployment

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October 2013

The U.S. Supreme Court decided to consider the matter of United States v. Quality Stores, in which the Sixth Circuit found that supplemental unemployment compensation payments were not subject to FICA (which consists of Social Security and Medicare taxes on employers and employees). Specifically, the Sixth Circuit held that while severance payments generally may be subject to FICA taxation, supplemental unemployment compensation is treated differently. Congress’s intent was to exempt supplemental unemployment compensation payments from FICA taxation. Section 3121(a) of the Internal Revenue Code defines the term “wages” for FICA purposes. Wages include all remuneration for employment, with certain limited exceptions. IRS regulations interpreting Section 3121(a) further provide that remuneration for employment constitutes wages even though at the time paid the individual is no longer an employee. The IRS interprets the phrase “remuneration for employment” broadly, as does the U.S. Supreme Court. Nevertheless, the Sixth Circuit’s construction of Code Section 3402(o) – which appears to provide a different set of rules for supplemental unemployment compensation in particular – was a persuasive plain language reading of the Code and may ultimately be upheld by the Supreme Court. Oral arguments and a decision are expected in 2014. 

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