IRS Issues Guidance on Income and Employment Tax Refunds for Same-Sex Spousal Benefits

Sept. 26, 2013

The IRS released guidance for employers on how to request refunds of improperly withheld tax on same-sex spousal benefits. The guidance follows the Supreme Court’s decision in United States v. Windsor, which held unconstitutional Section 3 of the Defense of Marriage Act. This release supplements previous IRS guidance on the effect of the Windsor case to same-sex married couples.

Following Windsor, the IRS confirmed that the definition of “spouse” for federal tax law purposes would include same-sex spouses recognized as married by a state or foreign country. As a result, same-sex couples are eligible for the federal tax exemption allowed for certain fringe benefits. These fringe benefits include employer-paid contributions for accident and health plans, qualified tuition-reduction payments, meals or lodging provided for the convenience of an employer, dependent care assistance payments, and other fringe benefits excludible from employee wages.

For the 2013 tax year, employers can claim a refund of the employee and employer share of payroll taxes, as well as a refund of income taxes withheld on these benefits that previously were subject to tax. To claim the refund, employers can file a fourth-quarter Form 941, “Employer’s Quarterly Federal Tax Return,” including the corrected amounts for 2013, or file a Form 941-X, “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund,” before issuing 2013 W-2s to employees. Employers might be wise to consider obtaining 2013 refunds on the fourth-quarter Form 941 to avoid timing issues with respect to filing Form 941-X and issuing W-2s. For amounts paid in the third quarter of 2013, employers can refund the tax and exclude the original withholding from the third-quarter Form 941 or use one of the procedures previously noted.

For years prior to 2013, only Federal Insurance Contributions Act (FICA) refunds can be claimed by employers. In most cases, employers can file refund claims as far back as 2010, with 2010 refund claims due by April 15, 2014. For tax years prior to 2013, employers should file Form 941-X for the fourth quarter of any year being adjusted.

Employers can request a refund of 2013 income tax withholding and an employee’s share of FICA for 2013 and prior years only if the employer does one of the following:

  • Reimburses the employee for his or her portion of the requested refund prior to filing the refund claim
  • Obtains the consent of the employee to file a refund claim on his or her behalf

Same-sex spouses can amend their income tax returns to file as married in order to obtain a refund of the income taxes paid on the previously taxable benefits. Before amending prior-year returns to file as married taxpayers, same-sex couples should consider the pros and cons of doing so, including the marriage penalty. In many cases it might be beneficial not to amend prior-year returns because of the marriage penalty.

Notice 2013-61 details the procedures to follow when amending tax returns.

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Howard M. Wagner
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