Severance and FICA Taxes

Current tax law says you and your employer must pay a tax of 15.3% of your total wages (subject to certain limits) because of the Federal Insurance Contribution Act (FICA).  This is what pays for social security and medicare. This tax is only due on earned income and it is split between you and your employer. A recent tax court ruled that severance payments are not earned income and are thus not subject to FICA tax. If this applies to you, your former employer will need to file to get the taxes back, but it might be worth checking with anyone who paid you severance since 2006.

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