The U.S. Supreme Court on June 26 ruled in United States v. Windsor (U.S. Supreme Court, 12-307, 2013) that Section 3 of the federal Defense of Marriage Act (DOMA)—the section that limits marriage to heterosexual couples for federal benefits—unconstitutionally denies legally married same-sex couples equal protection of the law in violation of the Fifth Amendment.
Key: The Court specifically mentioned the taxability of health benefits for same-sex spouses, an issue the IRS must now address.
Note: The decision leaves who can marry whom up to the states. Currently, same-sex marriage is legal in 13 states and the District of Columbia. For details, read "DOMA strike-down will ripple through HR."
Payroll patchwork. As of press time, the IRS hasn’t said how Windsor affects payroll taxes.
However, if you’re located in a state that recognizes same-sex marriage, employees now have the same right to tax-free benefits as married heterosexual couples. While these benefits are already tax-free for state purposes, it’s advisable that you continue to withhold federal taxes until the IRS issues guidance. Employees may also seek to refile their W-4s to claim married status.
REFUND OPPORTUNITY? Employers and employees may be entitled to refunds of FICA taxes paid on same-sex spouses’ health benefits. Employees may also be entitled to income tax refunds. You can file a protective FICA refund claim with the IRS on your and your employees’ behalf until it provides guidance. Employees must file their own income tax refund requests.
Things are trickier if you’re located in a state that recognizes civil unions.
Reason: A 2011 letter written to H&R Block by an IRS senior technical reviewer concluded that, since Illinois treats heterosexual couples who enter into civil unions as married for state purposes, those couples could file Form 1040 jointly. The letter doesn’t set precedent, so you should continue to withhold federal taxes until the IRS makes its intentions clear.
On the other hand, the Windsor decision probably has no impact your payroll operations if you’re located in a state that doesn’t recognize same-sex marriage. Key: Under Section 2 of DOMA, which the Supreme Court didn’t touch, states that don’t recognize same-sex marriage don’t have to recognize same-sex marriages validly performed in other states. It’s unclear now how Section 2 affects federal payroll taxes. The tax status of domestic partnerships is equally murky.