In Notice 2013-61, the IRS announced the procedures employers should follow for filing refund claims for overpaid Federal Insurance Contributions Act (FICA) and income taxes paid on employer-provided benefits for same-sex spouses that, because of the Supreme Court’s Windsor decision, are now tax free. The notice provides two streamlined administrative procedures for making adjustments or claiming refunds.
At the end of August, the IRS issued Rev. Rul. 2013-17, explaining how it was going to treat same-sex married couples for tax purposes after Windsor, No. 12-307 (U.S. 6/26/13)). The ruling applied to taxpayers who are in any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country. These marriages are recognized for federal tax purposes, even if the state in which the couple currently resides does not recognize same-sex marriages. The IRS says this is consistent with its long-standing position (Rev. Rul. 58-66) that, for federal tax purposes, the IRS will recognize marriages based on the law of the state in which they were entered into and will disregard subsequent changes in domicile.
At the time, the IRS also announced that it intended to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. Notice 2013-61 contains those 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 Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2013, the employer will not report these wages and withholding on that form. If the employer does not repay or reimburse the employee for the overcollected amount before it files the third quarter 2013 Form 941, the 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.
Under the first alternative method, the 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 Dec. 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 income tax withheld from wages, tips, and other compensation reported on line 3 of Form 941 should be reduced by the amount of income tax withholding that has been repaid or reimbursed to employees by the end of the calendar year. If the value of any same-sex spouse benefits were included in taxable wages subject to Additional Medicare Tax withholding on line 5d, this amount should also be reduced. Employers that qualify will not have to file separate Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to correct each of the first three quarters of 2013.
Employers that have not reimbursed or repaid their employees by Dec. 31 can use the second procedure by filing Form 941-X. If the employer has satisfied the usual requirements for filing Form 941-X, including 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, the employer can use Form 941-X, and write “WINDSOR” in dark, bold letters across the top margin of page 1 of the form.
An employer may not claim a refund or credit for an overpayment of income tax withholding if the tax was deducted and withheld from the employee. This second procedure for 2013 cannot be used for income tax withheld from employees, because the employer can use this method only if it did not repay or reimburse employees for the amount of withheld taxes for same-sex spouse benefits provided in 2013 on or before Dec. 31, 2013. In these cases, employees will receive credit for the income tax withheld when they file their Form 1040, U.S. Individual Income Tax Return.
Notice 2013-61 also provides procedures employers should follow for overpaid FICA taxes for years before 2013 that are still open under the statute of limitation. Form 941-X must be filed, and the normal requirements that apply to correcting overpayments in earlier years must be followed, 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.