IRS Issues Notice 2013-61 Providing Streamlined Procedures to Correct Overpayment of Employment Taxes Post-Windsor
We recently reported on Revenue Ruling 2013-17, the first published guidance issued by the Internal Revenue Service (IRS) related to the Supreme Court's Windsor decision which struck down section 3 of the Defense of Marriage Act (DOMA). In Revenue Ruling 2013-17, the IRS declared that it would treat same-sex spouses the same as opposite-sex spouses for federal tax purposes, regardless of place of domicile, provided the marriage occurred in a jurisdiction that recognized same-sex marriage. The ruling applied prospectively as of Sept. 16, 2013. However, taxpayers could rely on the ruling for purposes of filing returns and adjusted returns that claimed refunds and credits for the overpayment of taxes.
Notice 2013-61, the second published guidance issued by the IRS related to the Windsor decision, was recently issued. In the notice, the IRS provides optional streamlined procedures that employers can use to claim a refund or credit for the overpayment of employment taxes on account of same-sex spouse benefits.
Employers can provide certain benefits that receive tax-favored treatment on the basis of marital status. Pursuant to section 3 of DOMA (pre-Windsor), this tax-favored treatment was only available for opposite-sex spouses. For example, pre-Windsor, an employer was required to impute income on the value of health coverage it provided to an employee's same-sex spouse, but an opposite-sex spouse would have received the coverage on a tax-free basis. As a result, before Windsor, an employee's premium payments for the same-sex spouse's health coverage were made on an after-tax basis, but premium payments for an opposite-sex spouse would have been made on a pre-tax basis. After Windsor, employer-provided health coverage may be provided on a pre-tax basis for both opposite-sex and same-sex married couples. Other benefits that might be impacted include tuition reduction benefits, meals and lodging benefits, dependent care flexible spending accounts and other fringe benefits under Internal Revenue Code Section 132.
Employment Tax Return for The Third Quarter 2013
Employers file Forms 941 (Employer's Quarterly Federal Tax Return) to report and pay employment taxes. Form 941 is due by the last day of the month following the end of the quarter (plus an additional 10 days if timely deposits were made). Revenue Ruling 2013-17 (issued in the third quarter of 2013 and which applies prospectively as of Sept. 16, 2013) most immediately impacts third quarter 2013 Forms 941 that are generally due by Oct. 31, 2013.
Notice 2013-61 provides that if an employer withheld employment taxes related to same-sex spouse benefits in the third quarter of 2013, and repays the employee for the over-withholding before filing the third quarter 2013 Form 941, then the employer should not report the wages and withholding on the third quarter 2013 Form 941.
If the employer does not repay the employee for the over-collection before filing the form, the employer must report the over-collection on the return and may use one of the special administrative procedures (generally described below) to claim a refund or credit.
Optional Correction Methods For 2013
The IRS provides two (optional) alternative special administrative procedures for employers that treated same-sex spouse benefits as wages on Forms 941 for the first three quarters of 2013.
Under the first alternative, an employer can repay its employees for the amount of over-collected FICA and income taxes related to same-sex spouse benefits by Dec. 31, 2013. The employer can then correspondingly reduce the wage and income-tax withholding amounts on the fourth quarter 2013 Form 941. By doing this, the employer would not have to file separate Forms 941-X to correct each of the first three quarters of 2013 in order to obtain a refund or credit. The notice provides additional detail on these procedures and should be consulted.
Under the second alternative, an employer that does not repay its employees for over-collected FICA and income tax related to same-sex spouse benefits by Dec. 31, 2013, (and who thus files the 2013 fourth quarter Form 941 without making the adjustment) may correct overpayments of FICA taxes using Form 941-X. Under this option, the employer could file one Form 941-X for the fourth quarter of 2013 and claim a refund or credit for the overpayment of FICA taxes paid in all quarters of 2013. Employers could not use this procedure to correct the overpayment of income tax withholding. Instead, the affected employees would receive a credit when they file their Forms 1040. Again, the notice provides for detailed procedures and should be consulted.
Optional Correction Method For Prior Years
The IRS provided a special (optional) administrative procedure employers can use to claim refunds or credits of overpayment of FICA taxes related to same-sex spouse benefits for years prior to 2013 for which the applicable statute of limitations has not expired (i.e., 2010, 2011 and 2012).
Under this procedure, the employer may file one Form 941-X for the fourth quarter of the prior year. This fourth quarter Form 941-X would include the adjustments or refunds for all overpayments of employment taxes related to same-sex spouse benefits provided during that year (including overpayments for the first three quarters of that year). The notice should be consulted for specific procedures.
Notice 2013-61 provides employers with optional, streamlined procedures to claim refunds or credits for overpayments on account of same-sex spouse benefits. The notice attempts to reduce the filing burden (for both employers and IRS personnel) by requiring one corrected Form 941 each year. These procedures are optional. An employer could continue to use the normal procedure of filing Form 941-X for each affected quarter to obtain a refund or credit.
If you have any questions or would like additional information regarding the Windsor decision and the IRS' new guidance and how they will impact your plans, please contact any member of Ice Miller's Employee Benefits Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.