Is severance pay due to a lay off subject to FICA taxes?

In November of 2012 the U.S. Court of Appeals ruled against the IRS by affirming a lower court's decision that severance pay do to a lay off are not subject to FICA taxes. This month we will see if the US Supreme Court will upholds the Appeals court’s ruling. If the Court rules against the IRS, the agency will need to process retroactive refund claims submitted by employers and employees. These claims could reach a total in the billions, and cause the IRS to lose a major source of future revenue.

See http://www.law.cornell.edu/supct/cert/12-1408

FICA Increase, FUTA Credit Reduction, & Federal Withholding Tables

We'd like to let you know about some federal tax changes that will affect you in the next several weeks.

FICA Tax
Employee FICA is scheduled to revert to pre 2011 rates - i.e. employee FICA will be 6.2% (up from 4.2%) on a base of $113,700. Medicare remains at 1.45% with an unlimited base. The employee portion of Medicare will be increased by .9% for wages over $200,000 in 2013.

Federal Withholding Tables
The IRS is intending to issue guidance on 2013 tax tables in the next week. You should continue to use 2012 tables until new tables are released. This is consistent with the recommendation of the American Payroll Association.

FUTA Tax
In November of 2012, the U.S. Department of Labor announced the final list of states that have outstanding federal loans for 2012. The states involved have not paid their Title XII loans in full, the conditions of which require all employers in those states to lose a portion of the credit against the full FUTA tax for 2012. Eighteen states plus the U.S. Virgin Islands failed to pay their loans in full in 2012 and as a result their FUTA credit has been reduced, subjecting employers in those states to higher unemployment taxes retroactive to January 1, 2012.

• Employers in the U.S. Virgin Islands must pay an additional 1.5% in FUTA taxes.
• Indiana employers must pay an additional 0.9%(max $63 per employee) in FUTA taxes.
• Employers in the following 14 states are required to pay an additional 0.6% (max $42 per employee) in FUTA taxes: Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island and Wisconsin.
• Arizona, Delaware and Vermont employers must pay an additional 0.3% (max $21 per employee) in FUTA taxes.

You should pay the additional FUTA tax due with your 2012 Form 940. To quickly calculate the additional amount of FUTA tax owed, review the your Company Totals for YTD Taxable Wages for FUTA and multiply the wages by the additional percentage:

• For IN, multiply those wages by .9% (max $63.00 for employees over the $7000.00 limit).
• For AR, CA, CT, FL, GA, KY, MO, NV, NJ, NY, NC, OH, RI, and WI multiply those wages by .6% (max $42.00 for employees over the $7000.00 limit).
• For AZ, DE and VT, multiply FUTA wages by .3% (max $21.00 for employees

WHAT HAPPENS WHEN A CORPORATION DOES NOT PAY THEIR PAYROLL TAXES?

When a corporation has unpaid payroll taxes, those who are responsible for the payment of the tax will be held personally responsible for 100% of the employee share of the tax.  This is called Trust Fund Recovery Penalty.  A responsible person is defined as a person who (1) is aware of the payroll tax liability, (2) has the ability to pay the tax and (3) acted willfully not to pay, regardless of the reason.  This “Penalty” will be assessed when it is determined the corporation is either unwilling or unable to pay the tax. The person could either be an officer, board member or even the bookkeeper.

In most cases the IRS will assume all officers and board member are responsible persons [regardless of the facts and circumstances] and will automatically assess 100% of the trust fund penalty against each officer and board member.  Generally an officer or board member will need to go to court to show they are not a responsible person.  Except in bankruptcy proceedings, before the individual is eligible to go to court they first need to pay the Trust Fund Penalty, and then sue in court for a refund.

An example of this is in the court case of Skoczylas v. the U.S. [Skoczylas v. USA, 09 Civ. 2035 (ILG) (RML), NYLJ 1202582026679, at *1 (EDNY, Decided December 3, 2012)].  The IRS automatically assessed the Trust Fund Penalty against a board member but in court was denied summary judgment and awarded the board member a refund.  Even though the individual was a director of the corporation, material fact issues remained as to whether she was responsible person who acted willfully with regard to corporation’s tax debts. Although she was director, she didn't manage corporation’s day-to-day affairs and lacked decision making authority over paying debts even though she had some check-signing authority.  In addition it was unclear as to whether creditors ran the corporation during bankruptcy and/or if she had actual control over the checkbook and bank accounts.  It was also undisputed that the CEO was a responsible person who acted willfully.

Please contact this office if you have any questions or need assistance.