Continuing its implementation of the United States Supreme Court decision in U.S. v. Windsor, the Internal Revenue Service (IRS) recently issued Notice 2013-61, which provides guidance for employers to make claims for refunds or adjustments of overpayments of Federal Insurance Contributions Act (FICA) and Federal income tax withholding (employment taxes) for 2013 and prior years with respect to certain fringe benefits and remuneration provided to same-sex spouses of employees.
In Revenue Ruling 2013-17 issued in August, the IRS announced that effective September 16, 2013, for Federal tax purposes, it would recognize same-sex marriages and was adopting a “place of celebration” rule pursuant to which all same-sex couples married in a state or foreign jurisdiction permitting such marriages would be recognized as spouses for federal tax purposes, regardless of their state of residence. It also announced that it intended to distribute streamlined procedures for employees who wish to claim refunds for federal income taxes paid on the value of health coverage to same-sex spouses and guidance for employers who wish to claim refunds for payroll taxes paid on such benefits.
Notice 2013-61 provides these special streamlined administrative procedures. Under these procedures, if an employer that withheld employment taxes for same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013 ascertains the amount withheld on those benefits and repays or reimburses the employee for these amounts before filing the third quarter Form 941 (Employer’s Quarterly Federal Tax Return) due on October 31, 2013, an employer need not report these wages and withholding on the third quarter Form 941. If an employer does not repay or reimburse the employee for the overcollected amount before it files the third quarter 2013 Form 941, an employer must report the amount of the overcollection on that return and can use one of two special administrative procedures to make an adjustment or claim a refund.
First Special Administrative Procedure for 2013
Under the first alternative special administrative procedure, an employer must repay or reimburse its employees for the amount of the overcollected FICA and income tax withholding for the same-sex spouse benefits for the first three quarters of 2013 on or before December 31, 2013, and then, on its fourth quarter 2013 Form 941, it may reduce the fourth quarter wages, tips, and other compensation on line 2, taxable Social Security wages on line 5a (subject to the wage base limitation for the year), and taxable Medicare wages and tips on line 5c, by the amount of the same-sex spouse benefits treated as wages for the first three quarters of 2013. The amount of overcollected FICA and income tax that is repaid or reimbursed for the first three quarters of 2013 will also reduce the amounts shown as tax withheld on the Form 941. Same-sex spouse benefits not includable in wages or subject to withholding for the fourth quarter of 2013 would not be included in wages or withheld upon in the first instance.
Second Special Administrative Procedure for 2013
Alternatively, employers may correct overpayments of the FICA taxes with respect to same-sex spouse benefits paid in all quarters of 2013 by filing Form 941-X provided that the employer satisfies the usual requirements for filing Form 941-X. These requirements include filing Form W-2c (if applicable), repaying or reimbursing the overcollected employee FICA tax to employees (or, for refund claims, securing consents from employees), and obtaining the required written statements from employees. If employing this correction method, the employer must write “WINDSOR” in dark, bold letters across the top margin of page 1 of the Form 941-X.
Special Administrative Procedure for Years Before 2013
Notice 2013-61 also provides procedures employers should follow for overpaid FICA taxes paid on same-sex spouse benefits for pre-2013 years for which the statute of limitations has not expired. Under this procedure, an employer may file one Form 941-X for the fourth quarter for the prior year that would include the adjustments or refunds for all overpayments of employer and employee FICA taxes for same-sex spouse benefits provided during that prior period, including overpayments reflected in the Form 941 for the first three quarters. The employer should write “WINDSOR” in dark, bold letters across the top margin of page 1 of Form 941-X. This special administrative method also is subject to the normal requirements that apply to correcting overpayments in earlier years, including the filing of Forms W-2c, Corrected Wage and Tax Statement, repaying or reimbursing employees, and obtaining the required written statements (and consents) from employees.
The IRS also confirmed that for pre-2013 calendar years, employers may not refund federal income taxes withheld from employees’ wages. However, for “open” years (generally, tax years 2010 to 2012), employees may receive refunds of income tax paid with respect to same-sex spouse benefits by filing a Form 1040X.
All of these alternative special procedures are voluntary and employers who prefer to use the regular procedures for correcting employment tax overpayments related to same-sex spouse benefits may do so.
Notice 2013-61 addresses claims for refunds or credits for federal tax purposes only. Where income was imputed under state tax law for same-sex spouse benefits, employers and employees will need to look to state tax law procedures to determine how the benefits will be treated for state income tax purposes. A number of states, including California, Minnesota, North Dakota, Oklahoma, Rhode Island, and Wisconsin have issued guidance regarding the state tax treatment of same-sex marriages.