Tax Legal Services · Primary-source case analysis

Quality Stores: Severance Payments Were Wages Subject to FICA

By Aneeta Mishra and Timothy Chan

Published April 19, 2026 · Updated October 18, 2026

Decision: United States v. Quality Stores, Inc., 572 U.S. 141 (2014).

Quality Stores reads FICA’s wage definition broadly and explains why an income-tax-withholding provision did not create a general severance exclusion.

Bankruptcy severance plans

Quality Stores paid severance to employees terminated during Chapter 11. Amounts varied with position and seniority and were not tied to state unemployment benefits. The company reported the payments on Forms W-2, paid its employer FICA share and withheld the employee share. About 1,850 former employees authorized refund claims, and the company sought $1,000,125 for itself and those employees. The IRS neither allowed nor denied the claim before the bankruptcy litigation. Quality Stores, 572 U.S. at 144–145.

Remuneration for the employment relationship

FICA defines wages as all remuneration for employment, subject to listed exceptions. Severance was paid only to employees and measured by their service, placing it within the broad definition even though no current labor was performed at payment.

The withholding statute did not narrow FICA

Section 3402(o) treats certain supplemental unemployment benefits as if they were wages for withholding. The Court read that administrative rule against its regulatory history and rejected the inference that all severance payments were therefore outside FICA wages.

Disposition and limit

All eight participating Justices reversed the Sixth Circuit and held these payments taxable; Justice Kagan did not participate. The Court expressly left a different question open: Whether IRS rulings exempting payments actually linked to state unemployment benefits fit FICA’s broad definition. A plan’s label as supplemental unemployment benefits does not establish that link or an exemption. The Court assumed these payments met the withholding statute’s SUB definition, yet still held them FICA wages. Quality Stores, 572 U.S. at 149, 156.

Key takeaways

• FICA wages include remuneration tied to the overall employment relationship.
• Severance does not fall outside wages merely because employment ended.
• Specific statutory exemptions inform the breadth of the general rule.
• Plan-specific terms, including links to state benefits, still matter.