A recent U.S. District Court case may provide a unique tax-saving opportunity for employers who have been forced to lay off workers during the recent economic downturn. In a surprising move, the Court said that severance payments made to the workers do not constitute "wages" for payroll tax purposes. Thus, the company was able to collect a refund of more than $1 million!
In the wake of this new case, you can file a protective refund claim for open tax years if your company previously paid the full amount of payroll taxes on severance payments. But you may have to act fast to file a claim for the 2006 tax year.
Let's start with some basics. As a general rule, "wages" that are subject to income tax withholding are also treated as wages for employment tax purposes. For 2010, an employee must pay a 6.2 percent Social Security tax on the first $106,800 of wages and a 1.45 percent Medicare tax on all wages. The employer must also pay its corresponding share of these employment taxes.
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