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New for Q3 and Q4: Withholding Tax Changes for Benefits Paid to Same-Sex Couples

October 1, 2013 by HR Advisor
Category: Compensation , HR Advisor

By Chris Brown
Summit Law Group, PLLC

Employers will need to use special care in handling their federal employment tax duties for Q3 and Q4 of this year. In the wake of the U.S. Supreme Court's Windsor decision, which struck down federal restrictions on same-sex marriage, the Internal Revenue Service (IRS) has issued recent guidance that clarifies how employers should address their Q3 and Q4 tax reporting. In particular, the IRS has issued two special procedures for securing tax refunds related to certain benefits provided to same-sex spouses of employees.


In U.S. v. Windsor, 133 S.Ct. 2675 (2013), the Supreme Court ruled that the definitions of "marriage" and "spouse" in the Defense of Marriage Act (DOMA) were unconstitutional. Under DOMA, these terms were limited to unions between a man and a woman. The Supreme Court held that the DOMA definitions and restrictions violated the principle of equal protection for same-sex couples married in states that permitted same-sex marriages.

Following Windsor, the IRS issued a revenue ruling indicating that it would recognize same-sex marriages for federal tax purposes. Specifically, Revenue Ruling 2013-17 held that if same-sex individuals are lawfully married under state law, then they will be treated in the same manner as any other married couple for federal tax purposes, regardless of their state of domicile. Thus, if a same-sex couple is married in a state where such marriages are permitted and then moves to a different state where such marriages are not recognized, the couple will still be treated as married for federal tax purposes. Same-sex individuals who have entered into a registered domestic partnership, civil union or other formal relationship that is not recognized as a marriage under state law do not receive this tax treatment. Therefore, for any same-sex couple, the key issue for federal tax purposes is whether the couple was married in a state that recognized the marriage.

In Notice 2013-61, the IRS has issued specific guidance to employers about their withholding obligations for benefits provided to same-sex married couples. The benefits in question include various types of fringe and medical benefits that are customarily provided on a tax-free basis to employees and their spouses. Prior to Windsor, the same-sex spouses of employees were not eligible for tax-free employer benefits, which resulted in many same-sex couples purchasing medical insurance and other benefits by using "after tax" dollars from their paychecks. These employees typically faced higher tax withholdings for both income tax and Social Security/Medicare taxes (commonly known as "FICA" taxes). Notice 2013-61 now provides a pathway for employers to recover 2013 and prior year tax refunds on behalf of these individuals by following special payroll tax procedures.

Next Steps - Q3 of 2013

For the third quarter of 2013 (July, August and September), employers must file their quarterly payroll tax return (Form 941) by October 31, 2013. To the extent an employer over-withheld income and FICA taxes during this quarter with respect to same-sex spouse benefits paid on behalf of an employee, the employer has two choices. First, the employer can repay the employee the amount of these taxes prior to filing its Form 941 for the quarter. In that case, the employer would omit a portion of the employee's wages in its Form 941 filing. Second, if the employer does not repay the over-withheld taxes to affected employees prior to filing the Q3 Form 941, then the employer is required to report the over-collected taxes on that return and use one of the special procedures described below to correct the problem in Q4 of 2013.

Q4 of 2013 - Two Special Procedures

Under a quirk of tax law, an employer can normally only receive an adjustment for over-withheld income taxes if the adjustment is made before the end of the calendar year. In contrast, an employer that over-withholds FICA taxes may file refund claims for the current year and prior tax years to the extent the prior years are still open under the statute of limitations. In both cases, an employer is generally required to repay or reimburse an employee for the over-withheld taxes prior to securing an adjustment or refund from the IRS.

In dealing with post-Windsor claims, the IRS has provided two alternative procedures. Employers that have over-withheld any 2013 taxes attributable to benefits paid to same-sex spouses must follow one or the other:

Adjustment Method - Under the first approach, on or before December 31, 2013 the employer must repay its employees for the amount of over-collected FICA tax and income tax withholdings with respect to same-sex spouse benefits for the first three quarters of 2013. After this repayment, the employer may make adjustments on its Q4 Form 941 (filed in January of 2014) to omit the applicable wage amounts for each affected employee. One advantage of this approach is that it will reduce the number of return filings.

Refund Method - If an employer does not follow the first approach, then it can only secure a refund of over-withheld FICA taxes (not income taxes) by filing a refund claim with the IRS, using Form 941-X. Under this option, the employer will file one Form 941-X for Q4 of 2013 to claim a refund of all over-withheld FICA taxes with respect to same-sex spouse benefits paid in all quarters of 2013. The employer must first repay the affected employees the over-withheld tax (subject to a few exceptions). The employer also must file corrected W-2 wage statements. As for any over-withheld income taxes, the employer does not receive a refund. Instead, each affected employee will simply claim a credit for these taxes on his or her 2013 individual tax return.

Prior Years

For open tax years prior to 2013, an employer may make refund claims for overpaid FICA taxes (not income taxes) by filing Forms 941-X for prior years. The employer is also required to follow all of the procedures applicable to refund claims, including the filing of corrected W-2 wage statements and repayment to employees for the over-withheld FICA taxes.


Notice 2013-61 includes many special instructions about the filings described above. These filings are materially different than customary refund and adjustment claims. Thus, employers should take care to review and follow the new IRS guidance and/or to seek guidance from their tax counsel or finance professionals.

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

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