I did a search on ER and found this thread on FICA taxes being withheld from separation pay: FICA Taxes on Severance Pay
. Due to its age, I could not add to it. [mod edit - threads merged]
As I will be receiving a lump sum separation payment this coming January from Megacorp, I was doing an Internet search on tax amounts that could be withheld from my payment and found the case in the 6th Circuit Court of Appeals (covering the states of Michigan, Ohio, Kentucky, and Tennessee) that the above referenced thread was discussing.
In September 2012, the Appeals Court upheld the district court's ruling that supplemental unemployment benefits (SUB) are not subject to FICA taxes, contrary to IRS guidelines and policy. The Department of Justice has requested the Appeals Court re-examime its decision. Even the Appeals Court believes this issue will be eventually settled by the Supreme Court due to the potential amounts of IRS refunds that will be due to taxpayers - estimated by the IRS to be in excess of 1 billion dollars.
The reason I believe an update is warranted is because of a misconception in the 2011 ER thread -namely, this ruling does apply to both the business that paid the FICA and the employees that had FICA deducted from their separation payment. In the thread, there was discussion that this ruling probably only applied to the company paying the tax. In reading the Court's decision, it turns out that the appellee (Quality Stores) asked its former employees if it could contest the payment of FICA taxes that were withheld from their severance pay as well the amount the company paid. Over half said yes (not that I think that really matters), so this decision also applies to the employees.
Another reason to add an update is some guidance that I found on a web page that is associated with the Association of Corporate Counsel. Since there is a 3-year statute of limitations for amending a tax return, the law firm that wrote an article about this case suggested that companies that do withhold FICA taxes on SUB payments file a 'protective refund claim' that would include any employee's refund as well. This law firm says that the company would need to obtain the employee's consent in order to file for them. Their belief is the IRS would then hold the refund claim in abeyance until this issue is resolved through the appeal process, which they estimate will take "years". From my reading, the strategy of a 'protective refund claim' would apply across the U.S. and not just for the states covered by the 6th Circuit since, if the Justice Department loses its appeal, it will apply nationwide.
Anyway, I think this is particularly applicable to anyone who worked for a company with a SUB plan and received a lump-sum severance pay that had FICA withheld since 3 years from the date of the Appeals Court decision (September 7, 2012). You might want to check to see if your company is planning on filing a 'protective refund claim' and make sure you are included in that claim - although it might be too late for the 2009 tax year. I haven't found anything yet that suggests individual employees should file something similar to the 'protective refund claim' if your company doesn't.
Because this discussion is already getting very long, here are some links that provide more detail than I believe can summarize accurately:
6th Court of Appeals 09/07/12 Decision: http://www.ca6.uscourts.gov/opinions...2a0313p-06.pdf
ACC Web Page Article: Court holds severance payments not subject to FICA taxes; refund claims should be filed soon - Lexology
PS: I am not a lawyer, so don't misconstrue this as any sort of legal or tax advice.
PPS: My experience in Megacorp is that you should not take for granted that your company knows about this and will automatically include the affected former employees in any protective refund claim. In 20+ years with my Megacorp in the corporate office, I would continually find that the people who should know about a subject did not have a clue about something that a simple Internet search would find.