If you’ve been terminated from a long-term job your employer may offer you severance pay, sometimes referred to as a separation package. Severance pay can include a lump sum payment, a period of continued paychecks, a continuation of some or all benefits, or other forms of payment. Employers aren’t required to offer severance pay, but those that do will have different policies and guidelines for how severance is handled.

Severance pay usually amounts to a week or two of pay for each year the employee worked for the company. For executives, the severance pay may even constitute up to a month’s pay for each year of service or whatever was negotiated in the senior employee’s contract.

Employees that have been offered a severance package by their employer as part of a separation agreement may be unsure about the taxation of a severance payment.

Although the recipient of the severance payment is a former – and not a current – employee, the payment is still considered “wages” for Oregon and federal income tax and withholding purposes, and is reported on IRS Form W-2.

Many years ago, legal disputes arose between employers and the IRS over whether severance pay is also “wages” subject to FICA (Social Security and Medicare) taxes and withholding. Two federal courts delivered conflicting rulings in this regard. Ultimately, in 2014 the Supreme Court, in a unanimous decision in United States v. Quality Stores, resolved the split between the courts, and agreed with the IRS that severance payments generally are wages subject to FICA taxes and withholding.

There is still one type of severance pay that is not subject either to income tax withholding or to FICA taxes and withholding. That is payments from a Supplemental Unemployment Benefit (or “SUB”) Plan, which are designed to supplement, and are tied to the receipt of, state unemployment benefits. The Court recognized that the IRS has specifically exempted those benefits.

If you are unsure about the terms and conditions of your severance pay, you should consult your tax professional or financial advisor. You can also consult the IRS publication “Tax Impact of Job Loss” here.