Employers that paid federal income tax (FIT) and Social Security and Medicare (FICA) taxes on the value of health care benefits provided to employees' same-sex partners for tax years 2009 and after should consider whether they want to file a protective refund claim while they await the US Supreme Court's decision in the pending Defense of Marriage Act (DOMA) case, United States v. Windsor. The filing deadline for a refund of taxes paid for the 2009 tax year is April 15, 2013. Filing a protective refund claim will preserve an employer's right to a refund pending the outcome of the case and will extend the statute of limitations for such claims by two years.
Federal Taxation of Same-Sex Spouses
In Windsor, the issue before the Supreme Court concerns the constitutionality of the term "spouse" under section 3 of DOMA (P.L. 104-199). Section 3 defines "spouse" for purposes of federal law as "a person of the opposite sex who is a husband or wife" within a "legal union between one man and one woman." The definition excludes same-sex marital partners. In 2012, the 2nd Circuit Court of Appeals held this section unconstitutional.
Section 105(b) of the Internal Revenue Code (IRC) excludes from the federal taxable wages and gross income of employees and their spouses the value of employer-provided health care and other benefits. However, if an employer provides such benefits to an employee's same-sex marital partner, no exclusion is allowed because of DOMA's definition of "spouse." As a result, the value of the benefit is included in the employee's wages and the employee consequently pays more FIT and FICA taxes. Since employers and employees pay an equal share of FICA taxes, employers of such employees also ultimately pay more taxes.
Implications of Windsor
If the Court in Windsor agrees with the 2nd Circuit and rules that same-sex marriages must be included in the federal definition of marriage, the value of health and other benefits that were included in the wages of employees' same-sex marital partners under DOMA and the IRC will be considered as overstated and FIT and FICA taxes will have been overpaid. As a result, affected employees and employers may claim refunds. The Court also may either limit the federal definition of marriage to only the few states that currently recognize same-sex marriage (CT, IA, ME, MD, MA, NH, NY, VT, WA and DC), or it may extend it to the even greater number of states that also recognize same-sex civil unions.
Payroll > Taxation of Employee Benefits > Nontraditional Living Arrangements