When dental practices lay off employees, severance pay is often a part of the deal. According to the United States Department of Labor, this pay is not required under any circumstances. However, many dental employers choose to offer severance pay in order to ease the transition into unemployment or a new job.
Unfortunately, even though severance pay is not a typical wage, the Supreme Court says it is still subject to the same payroll taxes as any other payment made to employees.
Taxability of Severance Pay
Like most other types of employee compensation, severance pay is subject to income taxes after it is received by the employee. However, because these benefits aren’t paid to employees for a specific period of hours worked or service provided, some dental employers have questioned whether severance pay should be subject to payroll taxes.
According to Forbes, this issue made it all the way to the Supreme Court after two cases tried in lower courts ended with conflicting decisions. In the end, the Supreme Court ruled that all severance pay is taxable under the Federal Insurance Contributions Act.
Applicable Taxes
Because of this recent ruling, employers must continue withholding payroll taxes from severance pay, as well as paying their portion of these taxes to the IRS. Payroll taxes include both Social Security taxes and Medicare taxes. According to the IRS, the current Social Security tax rate is 12.4 percent (6.2 percent from the employer and 6.2 percent from the employee). The current Medicare tax rate is 2.9 percent (1.45 percent from each party).