The Sixth Circuit Court of Appeals has recently held that severance payments are not subject to FICA (U.S. v. Quality Stores, Inc.)\
The court found that the severance payments in this case qualified as supplemental unemployment compensation benefits (SUB) under IRC Section 3402(o), which treats certain nonwage payments as if they were wages for income tax withholding purposes.
The Federal Circuit previously reached a contrary result, so it may be that the Supreme Court will eventually be asked to reconcile the matter.
The Sixth Circuit reasoned that the definition of wages should be the same both for income tax withholding and FICA purposes. And since Congress didn’t regard SUB payments as wages for income tax withholding, but treated them only “as if” the payment were wages for purposes of federal income tax withholding, it could not have regarded them as wages for FICA purposes.
A bit of hair-splitting?