IRS Employment Tax Overpayment Procedural Revisions and Post-Windsor Guidance
The IRS has issued simplified procedures that employers may use to correct employment tax (FICA and federal income tax withholding) overpayments for 2013 and prior years resulting from the change in tax treatment for health and certain other benefits provided to employees’ same-sex spouses due to the Supreme Court’s partial invalidation of DOMA in the Windsor decision. These optional procedures, which are intended to reduce the filing and reporting burdens associated with retroactive correction, follow up on earlier post-Windsor guidance announcing that the IRS will recognize for federal tax purposes all legal same-sex marriages, even if a couple resides in a state that does not recognize same-sex marriage. As background, employment taxes are reported quarterly on Form 941. Overpayments are normally corrected by taking a credit against taxes due in a later quarter (or, in some cases, claiming a refund) and filing Form 941-X for each quarter being corrected. If the overpayment includes excess amounts withheld from employees’ wages, the employer generally must repay the excess withholding to the employees before claiming an adjustment. The correction deadline is the later of three years after the filing date for the Form 941 being adjusted or two years from the date the taxes were paid.
The simplified procedures apply to overpayments with respect to same-sex spouse benefits that were treated as taxable to employees and after-tax employee contributions for same-sex spouse health coverage from employees who also made pre-tax elections for health coverage under a cafeteria plan. The available procedures are—
- Correction Within Third Quarter. For overpayments relating to the third quarter of 2013, an employer may adjust within this quarter without making any special filing, provided any amounts required to be returned to employees are repaid by September 30.
- Other Adjustments for 2013. Two alternatives are available for employers that overpaid taxes during the first three quarters of 2013.
- If any over-withholding is repaid to employees by December 31, 2013, the employer can use its fourth quarter Form 941 to correct overpayments for all of 2013—avoiding the need to file separate Forms 941-X for the prior three quarters.
- If the employer does not repay the over-withholding to employees by December 31 (and, consequently, does not use the fourth quarter Form 941 to correct 2013 overpayments), the employer can make adjustments by filing a single Form 941-X for the fourth quarter to correct overpayments for all of 2013. This alternative applies only to FICA tax, since over-withholding of income tax not repaid by December 31 will have to be adjusted by employees on their individual tax returns.
- Adjustments Before 2013. The employer may file a Form 941-X for the fourth quarter of any prior year for which the correction period has not expired, and that single form will apply to all four quarters of that year. Forms W-2c for the adjusted years must be filed to correct information previously reported on Forms W-2. Again, this alternative does not apply to over-withheld income tax, since those adjustments will be made by employees (using information on the Form W-2c) on their individual tax returns.
While employers are likely to welcome the simplification provided by these procedures—but they can use the regular procedures instead if they choose. Either way, employers should consider the options, taking into account the various deadlines.