Noel v. New York State Office of Mental Health, Central New York Psychiatric Center, 697 F.3d 209 (2nd Cir. 2012): Court of Appeals for the Second Circuit Holds that Front Pay Is Wages for FICA

Noel v. New York State Office of Mental Health, Central New York Psychiatric Center, 697 F.3d 209 (2nd Cir. 2012): Court of Appeals for the Second Circuit Holds that Front Pay Is Wages for FICA

What if your client's award is reduced for FICA tax withholding and you don't warn the client? What happens if an employer fails to withhold FICA taxes from an award of front pay? Barry L. Salkin of Olshan Frome Wolosky LLP addresses these and the other issues.

Excerpt:

What is FICA? FICA, or Social Security tax, is owed on all remuneration paid by an employer to employees. One-half of the applicable FICA taxes is imposed against the employee, and the remaining one-half is imposed against the employer. The employer is required to withhold from an employee's pay the employee's portion of the FICA taxes.

FICA tax is composed of two parts: an Old Age Survivor and Disability Insurance portion ("OASDI" or Social Security) and a Hospital Insurance ("HI") portion. For tax years after December 31, 2012, there is an additional HI tax of .9% on taxpayers' (other than corporations, estates, and trusts) wages in excess of $250,000 for joint returns, $125,000 for married couples filing separately, and $200,000 for other taxpayers. (Unlike the existing FICA, this tax is imposed only upon the employee.) Thus, for tax years beginning after December 31, 2012, the HI tax would be 1.45% on the first $200,000 of wages ($125,000 on a separate return, $250,000 on a joint return) and 2.35% on wages in excess of $200,000 ($125,000 on a separate return, $250,000 on a joint return). These three threshold amounts are not indexed for inflation, thus, over time an increasing number of taxpayers will become subject to the higher rate (there will also be a new 3.8% Medicare contribution imposed after 2012 on net investment income, but the characterization of a payment as wages has no bearing upon that tax).

How FICA is related to resolution of employment-related litigation. In the context of the resolution of employment-related litigation, whether by settlement or judgment, it will not only be high wage earners who will be affected by the higher FICA tax rates. It is the position of the IRS and some courts, although there is authority to the contrary (see FSA 200029001), that wages are taxed in the year in which they are received, rather than the year to which the earnings relate. Therefore, if an award of back pay, front pay, or both, constitutes wages (as discussed below) and the period covers several years, the settlement could easily be subject to the additional 0.9% tax on FICA wages, even if the recipient's annual wages are well below the applicable threshold amount.

Access the full version of this article with your lexis.com ID. Additional fees may be incurred.

If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

Lexis.com subscribers can access the complete set of Emerging Issues Analyses for Labor & Employment Law the and the Labor & Employment Area of Law page.

For more information about LexisNexis products and solutions connect with us through our corporate site.