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Companies Could Claim Tax Refunds for Old Layoffs

With the economy still struggling to emerge into full recovery mode, a recent court ruling could mean good news for companies and laid-off employees: the ability to claim tax refunds connected to severance pay.

In February, a Michigan district court ruled in favor of a bankrupt farm equipment supplier, Quality Stores, saying that FICA payroll taxes should not apply to severance payments for laid-off employees, according to CFO.com. If the ruling is upheld, companies and employees may be able to get back the money they paid for the payroll taxes.

However, there are a few hitches. They must apply before this April 15 to claim the FICA tax payments from 2006, though they have time to claim the payments from later years. In addition, the IRS has already won an appeals court decision against another company, railroad giant CSX, which made similar claims. The IRS could move to deny the refund claims from those who file on the basis of the Quality Stores ruling.

Still, it might be a good idea to file for a protective refund claim via Form 941-X or 945-X by April 15, just in case the IRS eventually lets the refunds go through, especially if you’re filing for 2006 payments.

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