Are Severance Payments Considered Wages under FICA?
Wages for purposes of the Federal Insurance Contributions Act (FICA) tax are defined, for the most part, the same as wages for purposes of federal income taxes. The Internal Revenue Service (IRS) has generally treated severance pay as wages for both federal income tax purposes and FICA purposes. FICA tax is a United States employment tax imposed by the federal government on both employees and employers to fund Social Security and Medicare. For 2008, the employee’s share of the Social Security portion of the tax is 6.2 percent of wages up to a limit of $102,000. This limit, known as the Social Security tax wage base, goes up each year based on average national wages. The employee’s share of the Medicare portion is 1.45 percent of wages with no limit. The employer is also liable for a separate 6.2 percent and 1.45 percent for Social Security and Medicare taxes, respectively, making the total Social Security tax 12.4 percent and the total Medicare tax 2.9 percent of wages, for a total tax
