Global Tax Alert | 24 September 2013
IRS issues guidance for correction of wages and taxes for same-sex spousal benefits
In Notice 2013-61, the IRS provides guidelines for employers to follow in correcting the overstatement of federal wages and withheld taxes (income tax, Social Security and Medicare) with respect to certain fringe benefits provided to employees who were married to an individual of the same sex. The Notice follows Revenue Ruling 2013-17 implementing the federal aspects of the Supreme Court's decision in United States v Windsor, which held Section 3 of the 1996 Defense of Marriage Act (DOMA) to be unconstitutional. (See Tax Alert 2013-1659.)
Notice 2013-61 confirms that employers are required to issue Form W-2c, Corrected Wage and Tax Statement for all open tax years, generally, tax years 2010 through 2012, if certain same-sex spousal benefits were incorrectly included in wages reported on Forms W-2, in boxes 1, 3 and/or 5. The IRS also confirms that for calendar years prior to 2013, employers may refund excess Social Security/Medicare (collectively, FICA) but not federal income taxes withheld from employees' wages.
Finally, to reduce the administrative burden of making these retroactive corrections, employers may elect to follow special procedures for reimbursing employees for excess FICA and federal income tax withheld in 2013 and in correcting Forms 941 for current and previous tax years.
Revenue Ruling 2013-17 holds that, for federal tax purposes, the marriage of same-sex individuals in a state whose laws authorize the marriage is recognized, even if the married couple resides in a state that does not recognize the validity of same-sex marriages. For purposes of the ruling, the term "state" means any domestic or foreign jurisdiction having the legal authority to sanction marriage. Under the ruling, same-sex spouses are treated as married for all federal tax purposes, including income, gift and estate taxes. The ruling applies for all federal tax purposes for which marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, contributing to an IRA and employee benefits. The ruling further holds that, for federal tax purposes, registered domestic partners and individuals who enter into a civil union or other similar formal relationship are not treated as a married couple.
Affected fringe benefits
Notice 2013-61 follows the conclusion in Revenue Ruling 2013-17 that tax refunds may be claimed with respect to fringe benefits that were included in taxable wages as a result of DOMA prohibiting the recognition of same-sex marriages for federal tax purposes. For these purposes, fringe benefits include after-tax (rather than pretax) contributions for spousal health coverage elected by an employee under the employer's cafeteria plan as well as those benefits shown below.
Fringe benefits in scope under Revenue Ruling 2013-17
Health and accident coverage, including health savings accounts, health reimbursement arrangements and long-term care
Meals and lodging for the employer's convenience
Dependent care assistance
No-additional cost services and qualified employee discounts
Corrective procedures for tax year 2013
42013 third quarter (July, August, September):
If the employer withheld FICA and federal income tax with respect to same-sex spousal benefits paid to or on behalf of an employee in the third quarter of 2013 but later in the quarter refunded these taxes to employees before filing the third quarter 2013 Form 941, the employer does not need to show any adjustment because wages were correctly reported and the correct amount of FICA and federal income tax was withheld.
If the employer did not repay or reimburse the employee for excess FICA and federal income tax withholding with respect to same-sex spousal benefits before filing the third quarter 2013 Form 941, the employer may follow one of the two adjustment procedures described below to claim a refund or make an adjustment.
2013 all quarters1:
The IRS offers employers two optional procedures for correcting overstatements of wages and tax that resulted from same-sex spousal benefits provided in the first three quarters of 2013. Employers do not have to use either of these procedures and, instead, may follow the normal procedures for filing Forms 941-X and Forms W-2c.
(1) Include all 2013 adjustments on fourth quarter 2013 Form 941. Under this method, there is no requirement to file Form 941-X for the first three quarters for 2013, no requirement to obtain employee FICA consent letters, and no requirement to provide Forms W-2c because 2013 wages and taxes will be correctly stated by December 31, 2013.
To take advantage of this optional procedure, the employer must repay or reimburse its employees for the amount of the over-collected FICA and federal income tax withholding relating to the same-sex spousal benefits for calendar year 2013 on or before December 31, 2013.
After repaying or reimbursing the employees, the employer may reduce the amount reported on the fourth quarter 2013 Form 941 on line 2 (wages, tips, and other compensation), line 5a (taxable Social Security wages reported on line 5a up to $113,700 per employee) and line 5c (taxable Medicare wages and tips) by the amount of the same-sex spousal benefits incorrectly treated as wages for the first three quarters of 2013.
Federal income tax withheld from wages, tips, and other compensation as reported on Form 941, line 3, should be reduced by the amount of income tax withholding repaid or reimbursed to employees by December 31, 2013.
Similarly, if the value of any same-sex spousal benefits were included in taxable wages subject to Additional Medicare Tax withholding on Form 941, line 5d, the amount of taxable wages subject to Additional Medicare Tax withholding on the fourth quarter 2013 Form 941 should be reduced.
(2) File one Form 941-X for 2013. This procedure applies to an employer that does not repay or reimburse employees for the overpayment of FICA and federal income tax withholding on 2013 same-sex spousal benefits before December 31, 2013 and, thus, files the 2013 fourth quarter Form 941 without having made the necessary adjustments.
The advantage of this procedure is that a separate Form 941-X need not be filed for each of the four 2013 quarters. However, the requirement to obtain FICA consent letters from employees applies under this procedure, and Forms W-2c may be necessary if the corrections are not reflected on the 2013 Forms W-2.
Finally, when using this procedure, employers are not allowed to refund excess federal income tax or Additional Medicare Tax withheld from employees' 2013 wages (employees will obtain these federal tax refunds when filing a Form 1040 with the IRS).
Under this option, an employer may file one Form 941-X for the fourth quarter of 2013 to make adjustments or claim refunds or credits of overpayments of FICA taxes with respect to same-sex spousal benefits paid in all quarters of 2013, provided the employer has satisfied the usual requirements for filing Form 941-X, including repaying or reimbursing the over-collected employee FICA tax to employees (or, for refund claims, securing FICA consents from employees), and obtaining the required written statements from employees. The employer should write "WINDSOR" in dark, bold letters across the top margin of page 1 of Form 941-X. Only corrections relating to same-sex spousal benefits may be shown on this Form 941-X.
Corrective procedures for tax years prior to 2013
Under the normal procedure, employers are required to file a Form 941-X for each quarter in which corrections apply. Employers use this normal procedure, or they may elect to use the special procedure available for prior-year adjustments relating to same-sex spousal benefits.
For adjustments or claims of refund or credit for FICA tax overpayments pursuant to same-sex partner benefits for tax years prior to 2013, employers may elect to file just one Form 941-X for the fourth quarter of each of the open tax years. For most employers, the open years will be 2010 through 2012, unless the statute remains open for earlier years (e.g., a protective FICA refund claim was filed by the employer for tax year 2009). This fourth quarter Form 941-X would include the adjustments or refunds for all overpayments of employment taxes with respect to same-sex spouse benefits provided during such prior year, including overpayments reflected in the Forms 941 for the first three quarters of the year. The employer should write "WINDSOR" in dark, bold letters across the top margin of page 1 of Form 941-X. Note that this special procedure is available only for corrections pertaining to same-sex spousal benefits.
All of the other requirements applicable to wage reporting corrections and tax refunds continue to apply. Specifically, federal income tax withheld from wages cannot be refunded to employees, employee consents and written statements must be obtained in order to claim a refund of FICA tax, and Forms W-2c must be issued and filed.
Ernst & Young insights
This guidance gives employers a measure of relief in making retroactive adjustments for same-sex spousal benefits by reducing the number of Forms 941-X required to just one per year.
If employers identify 2013 wage overstatements relating to same-sex spousal benefits and refund related FICA and federal income tax withholding before December 31, 2013, they can avoid the time consuming collection of employee written statements for FICA refunds and the filing of 2013 Form W-2c.
Before finalizing Forms W-2c, employers will need to know how same-sex spousal benefits are treated for state income tax purposes. Keep in mind that numerous states may continue to include same-sex spousal benefits in gross income, creating a difference in the wages reported on Form W-2/Form W-2c, box 1 and Form W-2/Form W-2c, box 16. Additionally, many states are in the process of reviewing how recent IRS guidance will affect income tax filings, and Form W-2 reporting requirements are likely to be implicated in future state guidance.
A number of employer questions remain that future federal guidance may address. For instance:
If an individual taxpayer filed a protective refund claim for tax years prior to 2010, is the employer required to issue a Form W-2c for those earlier years since information returns (e.g., Forms W-2) do not have a statute of limitations whereas the employer's Form 941 statute of limitations is generally closed for tax years before 2010?
Will the IRS or other federal agency post a list of states and countries with same-sex marriage laws that are valid for federal income tax purposes? What information is the employer required or allowed to obtain for purposes of complying with federal, state and local income tax withholding requirements?
1 The same procedures are available to filers of Form 941-SS, Employer's QUARTERLY Federal Tax Return (American Samoa, Guam, the Commonwealth of Northern Mariana Islands, and the U.S. Virgin Islands), Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono, and Form CT-2, Employee Representative's Quarterly Railroad Tax Return (different lines are applicable on Form CT-2). The special procedures are not needed for filers of Form CT-1, Employer's Annual Railroad Retirement Tax Return, and Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, which are annual returns.
For additional information with respect to this Alert, please contact the following:
Federal Employment Tax Controversy Group (a subgroup of TCRMS)
- • Debbie Spyker
+1 720 931 4321
Employment Tax Services Group
- • Debera Salam
+1 713 750 1591
Compensation and Benefits Group
- • Liz Buchbinder
+1 202 327 7999
- • Christa Bierma
+1 202 327 7662
Federal Employment Tax Controversy Group (a subgroup of TCRMS)
- • Mary Angelbeck
+1 215 448 5307
- • Tony Arcidiacono
+1 732 516 4829
- • Mary Gorman
+1 202 327 7644
- • Tom Meyerer
+1 202 327 8380
Employment Tax Services Group
- • Julie Gilroy
+1 312 879 3413
- • Gregory Carver
+1 214 969 8377
- • Christina Peters
+1 614 232 7112
- • Kristie Lowery
+1 704 331 1884
- • Richard Ferrari
+1 212 773 5714
- • Kenneth Hausser
+1 732 516 4558