CCA 200935034: Severance pay is generally subject to wage withholding

Plain-English summary

This Chief Counsel Advice recommends adding employment-tax analysis to a discussion of severance pay. It explains that severance pay is generally includible in gross income and treated as wages for FICA and income-tax withholding purposes. The advice also discusses when IRC § 104(a) may exclude compensation for personal physical injury or sickness, noting that the exclusion requires an actual injury or sickness and a tort or tort-type claim. The analysis cites Treas. Reg. § 31.3401(a)-1(b)(4) and Abrahamsen v. United States.

Ruling snapshot

• Question: How should severance payments be treated for income-tax withholding and employment-tax purposes?
• Outcome: Advice given
• Key authorities: IRC § 104(a); Treas. Reg. § 31.3401(a)-1(b)(4); Abrahamsen v. United States, 228 F.3d 1360 (Fed. Cir. 2000).

Full text (IRS public release)

ID: CCA_2009072209590232 Number: 200935034
Release Date: 8/28/2009
Office: -----------------------------
UILC: 3401.01-00

From: --------------------
Sent: Wednesday, July 22, 2009 9:59:06 AM
To: ---------------------------------
Cc: ----------------------
Subject: RE: [---------------------------] ---------

If this is severance pay, I don't think that it is appropriate to focus exclusively in the writeup on section 104(a) and the fact that these payments are not excludable from income as compensation for injuries or sickness. If no one has claimed that the payments are excludable from income and wages based on section 104(a), then it may not be necessary to discuss in detail that the section 104(a) exclusion only applies where there is actual personal physical injury or sickness and the claim must be based on tort or tort-type rights. On the other hand, discussing this doesn't hurt - especially if the claimant has alleged that the amounts are excludable from income as compensation for injuries or sickness.

In any event, I think it would be appropriate to add information about the employment tax treatment of severance pay. Section 31.3401(a)-1(b)(4) of the Employment Tax Regulations provides that any payments made by an employer to an employee on account of dismissal, i.e., involuntary separation for the service of the employer, constitute wages for income tax withholding purposes regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payments. Severance pay, like the pay it replaces, is includible in gross income and is wages for FICA and income tax withholding purposes. See e.g., Abrahamsen v. United States, 228 F.3d 1360 (Fed. Cir. 2000).