In short, yes. Severance pay must generally be paid in the form of a payroll check. Although the courts in the United States were split on the issue, the United States Supreme Court in a unanimous 8-0 decision has ruled that severance pay is wages and as such is subject not only to income withholding, but also social security and medicare taxes (commonly referred to as FICA).

In United States v. Quality Stores, Inc., 693 F.3d 605 (2012), the U.S. Court of Appeals for the Sixth Circuit affirmed a district court ruling that some supplemental unemployment compensation benefits (SUB), commonly referred to as severance pay and severance payments, may be income but are not wages subject to FICA taxes. Earlier in CSX Corp. v. United States (518 F.3d 1328), the Court of Appeals in another district came to the opposite conclusion. On October 1, 2013, The United States Supreme Court agreed to review the decision rendered in Quality Stores, Inc. and to render a decision on whether severance pay and severance payments are wages subject to FICA taxes (social security and medicare).

In April of 2014 the U.S. Supreme Court issued a unanimous 8-0 decision holding that severance pay or severance payments made to involuntarily terminated employees ARE wages and ARE subject to Federal Insurance Contributions Act (FICA) taxes.

Employers who are planning on terminating an employee and offering a severance pay agreement to limit their potential future exposes (a good idea) should ensure that the severance pay is issued through their payroll company and that all income and FICA taxes are deducted from the gross amount of severance pay to be received by the terminated employee.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that, to the extent this communication concerns any tax matter, it was not written to be (and may not be) relied upon to (1) avoid tax-related penalties under the Internal Revenue Code, or (2) promote, market or recommend to another party any transaction or matter addressed.