Media


09/27/13


IRS Issues Special Procedures for Employment Tax Refund Claims in Wake of DOMA

Media Type: Alert

IRS Issues Special Procedures for Employment Tax Refund Claims in Wake of DOMA

By Meg E. Manchester, Esq.

On September 23, 2013, the IRS issued special administrative employment tax refund procedures for employers with same-sex married employees. Prior to the U.S. Supreme Court’s decision in U.S. v. Windsor, employer-paid benefits, such as health insurance, for the benefit an employee’s same-sex spouse were treated as additional compensation to the employee and subject to FICA taxes and withholding. The application of the Defense of Marriage Act (“DOMA”) made these benefits taxable as income to the same-sex employee-spouse, in spite of the fact that the same benefits could be enjoyed tax-free by a heterosexual married employee. The application of the Windsor decision means that these benefits are no longer properly taxable as income to the same-sex employee-spouse. As such, employers may be entitled to claim a refund for the employer portion of the FICA taxes paid in these situations.

The IRS recently issued Notice 2013-61, which outlines how employers wishing to amend their employment tax returns can seek a refund of the employment taxes paid on same-sex benefits. Because the procedures offered by the IRS differ based on whether or not the employer refunds the withholding amounts to the affected employee prior to the end of 2013, employers with this issue should seek assistance in determining the best course of action prior to year-end.

For the 2013 tax year, the Notice outlines two alternate procedures that may be used to correct an Employer’s FICA tax overpayments (and in certain cases, income tax withholding) on same-sex spouse benefits.

  1. If the employer refunds to the affected employees the over-withheld income tax and the employee portion of FICA taxes prior to December 31, 2013: The employer may simply reduce the amount of withholding and FICA for 4th quarter 941 (due January 1, 2014) by amounts over-withheld and over-paid for same-sex benefits for Q1, Q2 and Q3.
  2. If the employer does not refund the taxes to the affected employees before year-end: The employer may file one amended form 941X for the 4th quarter for all overpayments for 2013. The amended Form 941X should have the word “WINDSOR” written across the top of the return. In order to utilize this option, the Employer must first repay or reimburse the employees for the employee’s portion of FICA taxes or obtain the employees’ consent to pursue the refund. It is important to note that the Employer cannot seek refund of the income tax withheld under this alternative, but the employee will receive a credit for the over-withheld income tax when filing his or her 2013 1040.

Employers may also claim refunds for prior years where the statute of limitations is still open (generally 2010, 2011 and 2012). The Notice outlines one procedure for claiming these back refunds.

Refunds for Open Years before 2013. As above, the Employer may file one Amended Form 941X for the fourth quarter of each year for which a refund is claimed. Again, “WINDSOR” should be written across top of each return. As with the second available procedure for the 2013 year, the Employer must repay or reimburse an employee for the employee’s portion of the FICA taxes or obtain the employee’s consent. In circumstances where the employee is no longer with the employer’s company, obtaining consent may prove a bit more complicated. However, the IRS has stated that if a former employee cannot be located after the employer has expended reasonable efforts to do so, the employer, may still seek a refund, but such refund is limited to the employer’s portion of the FICA taxes paid. Additionally, the Employer must file with the IRS one corrected W-2 for each affected employee for each year that a refund is claimed. Again, it is important to remember that the employer cannot seek the over-withheld income tax. The employees will receive a credit if they choose to file amended 1040s for the open back tax years.

Lastly, remember that there is no refund of Social Security tax to either the employee or the employer if employee’s wages exceed the social security tax wage base after excluding the value of the same-sex spousal benefits.

If you have questions about your employment tax obligations, or any other tax matters, please contact one of our tax attorneys.


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