Businesses must amend payroll tax returns to protect potential severance pay tax refunds

There is new direction from the IRS for businesses that may seek severance pay tax refunds related to a recent district court decision.

In February, the U.S. District Court for the Western District of Michigan ruled that severance payments made to laid off workers are not subject to Social Security and Medicare taxes. This ruling could translate to significant refunds for some employers that laid off workers in past few years.

While the IRS is expected to appeal the court’s decision, it is important for you to protect your interests in the meantime, especially for taxes paid in 2006 due to the statute of limitations. Initially, businesses were told to file a protective refund claim (Form 843). However, the instructions for this form specifically say it cannot be used to obtain a FICA refund.

Instead, businesses are being asked to file amended payroll tax returns for 2006 by April 15th. The court’s ruling appears to only apply to businesses that made a “Reduction in Force”– although, the case does not define this term. The IRS is expected to deny refund requests, therefore a lawsuit may need to be filed within two years after the denial to hold open the period to obtain the returns, should the IRS lose on appeal and the refunds become available.

Please note that you should continue to pay Social Security and Medicare taxes on severance pay until the issue is decided.

As the IRS’ direction on this issue continues to evolve, Elliott Davis will keep you updated on the impacts of the court decision, potential appeals and the possible effects on your business.

If you have any questions or need assistance, please contact Jason Sweatt at 864.242.2602 or .(JavaScript must be enabled to view this email address).