Posting by Brian Wynne

As promised, the IRS yesterday issued guidance for employers who need to correct prior payroll tax withholding for employees previously taxed on certain same-sex spouse benefits. In Notice 2013-61, the IRS outlines two optional special procedures for correcting income tax withholding and Federal Insurance Contribution Act (FICA) tax withholding for all prior quarters in 2013. It also outlines the procedure for claiming refunds on prior years’ FICA taxes withheld.
The IRS announced last month in Revenue Ruling 2013-17 that all legally married same-sex couples will be treated as married for federal tax purposes, regardless of where they currently reside, as long as they were legally married in a state or other jurisdiction that allowed the marriage. Prior to this ruling, an employer who provided health care benefits or other fringe benefits to an employee’s same-sex spouse treated the value of those benefits as taxable income to the employee for income tax withholding and FICA tax withholding. Since the same-sex spouse is now considered a legal spouse under the Internal Revenue Code, the value of those benefits is no longer taxable to the employee. The ruling also allowed for retroactive treatment of the law change for prior years that are still within the statute of limitations.

For 2013, employers can recover federal income tax withholding and FICA taxes using the first alternative procedure outlined in the notice. The employer can use the fourth quarter 2013 Form 941 to correct the overpayments that occurred in the first three quarters of 2013. The employer must repay the employee’s share of over-collected income and FICA tax withholding, and simply reduces the fourth quarter amounts by the over-collected amounts and over-reported wages. Using this procedure, all corrections must be made by December 31, 2013.

The second alternative procedure is used for corrections made after December 31, 2013. Under this procedure, employers may file one Form 941-X for the fourth quarter of 2013 to correct all four quarters of 2013. Only FICA taxes may be corrected under this procedure, since income tax withholding cannot be corrected after December 31, 2013. Similar to the first alternative procedure, the employees are reimbursed for their share of FICA taxes, and the employer is refunded both the employer and employee’s share on the 941-X. The income tax withholding stays as it is, and the employee would simply be refunded that much more when they file their 2013 individual income tax return.

For years prior to 2013, only the second alternative procedure can be used as long as the statute of limitations has not yet expired. A fourth quarter 941-X for the applicable year is filed to correct all four quarters of that year. For prior year income tax withholding, employees must amend their individual tax returns (which is also optional under Revenue Ruling 2013-17).

For further details on how to implement the procedures, refer to the IRS notice here, starting on page 10.