In certain situations, an employee whose job is eliminated may receive a lump sum severance payment from the employer. The payments vary greatly, often dependent on the length of employment and reason for the termination. The dispute was whether the payments were subject to social security and medicare taxes, commonly referred to together as FICA taxes (referring to the Federal Insurance Contributions Act). Historically severance payments were subject to FICA taxes, but a lower court had ruled the payments were not subject to FICA, with the conflict in rulings ultimately making it to the Supreme Court.
In the case in front of the Supreme Court, Quality Stores, Inc., closed several plants as it entered bankruptcy and paid discharged employees severance pay. The employer reported the payments as wages on Form W-2, paid its share of FICA taxes, and withheld the employee's portion of FICA taxes and income taxes from the payment. There was no dispute that the severance payments constituted income and were subject to income tax. Both employers and employees pay a portion of the FICA taxes, resulting in the two sides being aligned in requesting the refund in this particular case.
In short, the Court ruled the definition of "wages" under FICA which includes "all remuneration for employment" did include severance payments. The 17 page opinion had more detail on the facts and the basis for the ruling.
A large number of employees, employers, and the IRS all had a lot of money riding on this ruling. According to a Wall Street Journal article from November 8, 2013, when the Court said it would hear the case, more than 2,400 refunds had been claimed, requesting more than $1 billion in total refunds based on the lower court ruling. Following this ruling, those refund requests will be denied.