A disagreement between two federal appeals courts regarding whether payroll taxes must be paid on severance payments made to laid-off workers has landed the issue in front of the U.S. Supreme Court. Oral arguments began January 14th, 2014. How the Supreme Court decides the case, called United States v. Quality Stores, Inc., may result in payroll tax refunds being owed to both employers and employees who paid or received severance over the past few years.
Pending the outcome of the Supreme Court’s decision, the IRS has suspended action on payroll tax refund claims involving severance payments filed by employers in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee). For employers outside the Sixth Circuit, the IRS is continuing to disallow employers’ refund claims. However, employers both inside and outside of the Sixth Circuit should promptly file amended employment tax returns to preserve their rights. For employers outside of the Sixth Circuit who file a refund claim, if the end of the two-year period for filing a refund suit after a notice of disallowance is approaching, then the employer should use IRS Form 907, Agreement to Extend the Time to Bring Suit, to extend this deadline.
Individuals laid off in the past three years can file IRS Form 843 to make a refund claim for his/her individual portion of payroll tax overpayments due to receipt of severance payments. However, the employee should first ask his/her former employer if the company is pursuing a payroll tax refund. Some companies have alerted former workers that they are doing so, but they are not required to notify former employees unless the IRS agrees to pay a claim (and the IRS is unlikely to pay any claims until after the Supreme Court decides the Quality Stores case). At that point, the employer generally asks the former workers for consent to include their claims with its own. This sets up a process so that the company can pay former workers their shares of refunded payroll tax. If the individual’s former employer did not file a refund claim, then the individual can file IRS Form 843 to make his/her own claim. Note that the individual must make this claim within the statute of limitations, which is generally three years after he/she files the tax return reporting the severance payments. Also note that if a taxpayer is successful and receives a payroll tax refund, the refund is not taxable, but the interest paid on the refund is taxable.
Whether a payroll tax refund is owed to an employer or an individual will be specific to each employer and each individual. To determine if you may be entitled to a payroll tax refund and how to best preserve your right to a refund, we encourage all employers to contact Jason Luter at Gray Reed & McGraw, P.C. jluter@grayreed.com; 469-320-6076.