The demise of the Defense of Marriage Act (DOMA) means that you and your same-sex married employees are in line for payroll tax refunds. To expedite the process, the IRS is providing three optional streamlined refund procedures.
Key: These procedures apply to refunds of payroll taxes paid with respect to health benefits, dependent care benefits and benefits provided under tax code Section 132 (i.e., no-additional-cost services, qualified employee discounts, spousal travel that is a working condition fringe, qualified retirement planning services and access to on-site gyms). (Notice 2013-61, IRB 2013-42)
Corrections for 2013. Two optional streamlined procedures apply if you treated the value of same-sex spousal benefits as taxable for the first three quarters of 2013.
• Option #1: Refund and reduce. Repay employees the FICA and income taxes that were overwithheld by the end of this month. Then make the following reductions on your fourth-quarter Form 941: reduce wages reported on Line 2, income tax withheld reported on Line 3, taxable Social Security wages reported on Line 5a (up to the 2013 wage base) and taxable Medicare wages reported on Lines 5c and 5d.
To ensure that the amount reported on Line 10 matches the amount reported on Schedule B, show employees’ repayments and the corresponding reduction in the employer FICA match on Schedule B on the date the repayments are made and carry them over to the next day, if necessary, so that the amounts reported on Schedule B aren’t negative.
• Option #2: Filing Form 941-X: If you don’t, or can’t, repay employees for their overwithheld FICA and income taxes by the end of the month, you may file one Form 941-X to correct the overwithheld FICA taxes for all quarters of 2013. The usual rules apply: Repay the overwithheld FICA taxes to employees and secure their consent to pursue the FICA refund, provide them with Forms W-2c and file Forms W-2c/W-3c with the Social Security Administration.
Write “WINDSOR” in dark, bold letters across the top of Form 941-X. No other corrections may be made on this Form 941-X. Employees’ take a credit for their overwithheld income taxes on their 2013 Form 1040.
Corrections for prior years. The IRS is allowing employee and employer FICA refunds for prior years, up to the applicable Social Security wage base, provided the statute of limitations is open (generally tax years beginning in 2010). Under the third procedure, you account for all the corrections to an open year by filing one Form 941-X for the fourth quarter of that year. The rules that apply to filing Form 941-X under Option #2 apply here, as well.
GROSS-UPS NOT COVERED? The second and third optional procedures don’t appear to apply if you grossed-up the cost of same-sex spousal benefits. It appears that you would have to use the normal Form 941-X procedure of filing Form 941-X for each quarter you’re correcting.