Last June, the U.S. Supreme Court said Sec. 3 of the federal Defense of Marriage Act (DOMA) was unconstitutional. As a result, employers must treat all married couples, whether of the same or opposite sexes, equally. If, in the past, you offered health coverage to same sex partners and treated this as a taxable benefit, you (and your employee) are in for a tax refund. This is because the coverage for a spouse is exempt from FICA taxes as well as income tax withholding. The IRS has provided guidance to help you file for a refund.
The IRS has created two simple ways to adjust for FICA overpayments in the first three quarters of 2013:
- Method 1: Use the fourth quarter 2013 Form 941, Employer’s QUARTERLY Federal Tax Return, to correct these overpayments of employment taxes for the first three quarters of 2013.
- Method 2: File one Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct these overpayments of FICA taxes for all quarters of 2013.
For overpayments in prior years not yet closed by the statute of limitations, you can make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year rather than filing a separate Form 941-X for each quarter.
You cannot receive a refund for income taxes you deducted or withheld from an employee.
Dealing with employees
To obtain a refund, you have to repay or reimburse the employee in the amount of the overcollection. This can be done by making a direct payment to the employee or by applying the amount of the overcollection against the employee FICA tax which applies to wages you pay to the employee.
In addition to repayment, you must also obtain the employee’s written statement confirming that the employee has not made any previous claims (or the claims were rejected) and will not make any future claims for refund or credit of the amount of the overcollected FICA tax.
Important: You are not barred from a refund if the employee cannot be located or if the employee fails to give consent after you have made a reasonable effort to obtain it.
In addition to refunding FICA taxes and obtaining the necessary consent, you must also file Form W-2c correcting Form W-2, Wage and Tax Statement, if an amount of employee Social Security or Medicare tax shown on the Form W-2 is incorrect and is adjusted or refunded; the amount of Social Security wages or Medicare wages shown on the Form W-2 is incorrect; the amount shown in Box 1, Wages, tips, other compensation, is incorrect; or the amount of income tax actually withheld from the employee is incorrectly reported in Box 2, Federal income tax withheld.
As an employer, it seems as if there’s always something new to do. At least this is a good thing for you (and any affected employee). If you don’t know your obligations and opportunities with respect to employees who are same-sex spouses, talk with your tax advisor.