How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Merlo Your Own Question
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
Type Your Tax Question Here...
Merlo is online now
A new question is answered every 9 seconds

I was recently terminated by an employer of over ten years.

This answer was rated:

I was recently terminated by an employer of over ten years. I reached an agreement with my former employer on a six-figure settlement with them which allowed both of us to avoid court. They deducted Federal & State (CA) taxes from the payment which I understand. They also deducted Medicare taxes with which I don''t agree. The compensation was not for any employment that I provided them, it was a potential litigation settlement. Should I ask them for the Medicare tax amount?


A settlement that you receive as a result of employment termination, whether it is received through litigation or outside of litigation, is generally subject to both income taxes and employment taxes, meaning medicare and social security. The exact wording from the IRS position on this is as follows:

"Settlements of suits in cases of employee termination arise from a variety of causes of action. The settlement could be for a breach of contract, a tort, or a violation of any one of a number of federal or state statutes such as the Age Discrimination in Employment Act or the Americans with Disabilities Act. All the facts must be considered, for instance the complaint, the settlement document, a court's opinion, etc., to determine what the award is for. There is no simple answer to this question.

In general, severance payments are wages for employment and are subject to FICA taxes. If the payments arose in connection with the employment relationship and that the amounts were based on salary and years of service, these are indications that the settlement amounts are wages for employment.

Wages are generally subject to social security and Medicare (FICA) tax when they are actually or constructively paid. Severance payments are subject to FICA tax in the year in which they are paid. The FICA tax rate and wage base are those in effect in the year of payment. FUTA tax and income tax withholding also apply."

Even though the settlement you received was not for actual hours worked through employment, the settlement still arose in connection with your employment, and is therefore treated the same as normal wages.

I know this was not the answer you were looking for, but unfortunately those are the regulations.

If this was helpful, kindly press the Accept key. Positive feedback is also appreciated.

Thank you.

Merlo and 2 other Tax Specialists are ready to help you

Related Tax Questions