Executive Summary: As promised, the Internal Revenue Service has prescribed special procedures that employers may use in order to retroactively correct FICA withholding and payment following the Supreme Court's decision earlier this year in United States v. Windsor, and last month's Revenue Ruling 2013-17 (the "Ruling"), under which same-sex couples are treated as married for all federal tax purposes if they were legally married, regardless of residence. For background, see our previous Legal Alert: IRS Answers Residence Question for Same Sex Spouses, at http://www.fordharrison.com/9568, and the article linked therein.
Prior to the Windsor decision, the Defense of Marriage Act prohibited recognition of same-sex marriages for purposes of Federal laws – including the Internal Revenue Code. As a result, employers were required to withhold and pay employment taxes with respect to certain benefits provided to an employee's same-sex spouse because the marriage was not recognized for purposes of the Code, and the benefits therefore could not be treated as excludable from gross income or wages for Federal income or employment tax purposes. Employers also may have withheld and paid employment taxes on amounts paid for services performed by an individual in the employ of the individual's same-sex spouse because the employment tax exceptions for certain remuneration paid to spouses would not have applied. Revenue Ruling 2013-17 provided generally that its holdings would be applied prospectively as of September 16, 2013 (the date of publication of the Ruling in the Internal Revenue Bulletin).
Taxpayers may also rely on the Ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from application of the Ruling, including for purposes of determining filing status and for purposes of providing exceptions from the definition of "employment," provided that the applicable statute of limitations has not expired, and further provided that if a taxpayer files an original, amended or adjusted return, or a claim for credit or refund, in reliance on the Ruling, all items required to be reported on the return or claim that are affected by the taxpayer's marital status are adjusted to be consistent with the new marital status reported on the return or claim. The Ruling also provides that taxpayers may rely (subject to the stated conditions regarding the applicable statute of limitations and consistency within the return or claim) on its holdings retroactively with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund concerning employment tax and income tax with respect to employer-provided health coverage or certain other enumerated employer-provided nontaxable fringe benefits.
Generally, corrections of overpayments of FICA tax can be made after an error has been ascertained either by adjustment or by requesting a refund. An error is "ascertained" when the employer has sufficient knowledge of the error to be able to correct it. Before making an adjustment of an overpayment of FICA tax with respect to an employee, an employer generally must repay (by making direct payment to the employee) or reimburse (by applying an overpayment against future tax) the employee in the amount of the overcollection prior to the expiration of the statute of limitations on credit or refund, and, in the case of FICA tax that was overcollected in a prior year, must also secure the employee's written statement that the employee has not made any previous claims (or has made claims but they were rejected), and will not make any future claims, for refund or credit of the amount of the overcollected employee-FICA tax. Before requesting a refund, an employer must either repay or reimburse the employee, or obtain the employee's consent to allowance of the refund and request a refund on the employee's behalf. (Employee consent need not be obtained if employee FICA was not withheld, if the employee cannot be located after diligent search, or if the employee refuses consent.)
Employers cannot adjust overpayments of withheld income tax after the end of the calendar year, except to correct administrative errors (e.g., reporting amounts on Form 941 that were, in fact, not withheld). In addition, no refund may be requested for an overpayment of withheld income tax which was withheld from an employee.
To make employment tax corrections for overpayments (that is, to make adjustments or to claim refunds), an employer uses Form 941-X. Generally, a separate "X" form must be filed for each taxable period. An employer adjusting a return filed for a prior year, or claiming a refund or credit of FICA taxes for a prior year, is also required to file Forms W-2c, Corrected Wage and Tax Statement, for the adjusted year. The employer also must file Forms W-2c correcting Forms W-2 if the amount of employee FICA tax (Social Security or Medicare) shown on the Form W-2 is incorrect and is adjusted or refunded, if 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).
The IRS' new Notice (Notice 2013-61) states that "to reduce administrative burden, this notice provides special administrative procedures for adjustments and claims for refunds or credits for overpayments of employment taxes attributable to same-sex spouse benefits, including overpayments that result from a taxpayer's retroactive application of the holdings in Rev. Rul. 2013-17." The following procedures are prescribed.
Overwithholding for the third quarter of 2013. If an employer repays or reimburses the employee for the amount of taxes overwithheld in the third quarter before filing the third quarter's Form 941, the employer should not report the wages and withholding on the third quarter's Form 941. If the employer does not repay or reimburse the employee for the amount of the third-quarter overcollection before filing the third quarter Form 941, the employer must report the amount of the overcollection on that return and should use one of the special administrative procedures described below to make an adjustment or claim a refund for the overpayment.
Correction in fourth quarter of employer- and employee-FICA, and income tax withholding, for first three quarters of 2013. An employer can adjust its fourth-quarter Form 941 in order to exclude amounts (as appropriate) from taxable wages, Social Security wages, Medicare wages, Social Security tax withheld, Medicare tax withheld and Additional Medicare tax withheld, and may make corresponding adjustments to employer-FICA payments reported, to reflect exclusion of previously-included amounts from first three quarters' returns. Any amounts that have to be refunded to employees in order to effect this correction must be paid by December 31, 2013. This alternative eliminates the need to file Forms 941X.
Alternative Correction in fourth quarter. If required repayments to employees are not made by December 31, an employer may still correct by filing a single Form 941X in the fourth quarter, adjusting the entire year, instead of filing separate forms 941X for each prior quarter, provided that the usual requirements that apply to claims for adjustment or refund are met (e.g., reimbursing overcollected employee FICA, obtaining employee consent for refund claims, etc.). Additional specific instructions are provided; e.g., write "WINDSOR" on page 1 of the Form 941X; include in the claim only amounts that may be adjusted under the Notice, etc.
Correction of FICA overpayments for prior years. Overpayments (and overwithholding) of FICA for years prior to 2013, but for which the statute of limitations has not expired, may be corrected by filing a single Form 941X for the fourth quarter of the year, incorporating totals for the year. Corrections are otherwise subject to all additional requirements (e.g., furnish Forms W-2c to affected employees), as well as some added requirements (e.g. write "WINDSOR" on the return). Income tax withholding for prior years may not be adjusted by employers, but Form W-2c showing corrected amounts of wages will enable employees to obtain refunds of overpaid income taxes.