Are Forms W-2c required for same-sex spousal benefit included in wages because of the Defense of the Marriage Act? The answer turns on how the US Treasury and IRS dealt with the issue of retroactivity subsequent to the Windsor decision.
Revenue Ruling 2013-17 set forth the tax treatment of same-sex spousal benefits subsequent to the Supreme Court’s decision in Windsor. Specifically, the revenue ruling provides that its holdings will be applied prospectively as of September 16, 2013.
The revenue ruling also generally provides that affected taxpayers may rely on the ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from the holdings of the ruling, provided the applicable limitations period for filing such claim has not expired.
Subsequently, the IRS issued Notice 2013-61 to provide guidance for employers and employees making claims for refund or adjustments of FICA taxes and income tax withholding resulting from Windsor and the holdings of the revenue ruling. Special administrative procedures are provided for employers using the optional retroactive application of the revenue ruling.
IRS current position
IRS personnel have recently confirmed informally that should employers choose to file claims for refund for tax years prior to 2013, Forms W-2c are required to be issued.
If, however, employers do not file such refund claims, it is not clear how individual taxpayers, in the absence of a Form W-2c, can determine the amount of same-sex spousal benefits included in prior years Forms W-2, or to what extent employers are required to provide that information upon request.
The current IRS position on the optional retroactive application of the revenue ruling raises a concern about the practical application of the Windsor decision on same-sex spousal benefits received prior to September 16, 2013.
Many employees depend on information from their employers concerning the details of what is included in wages reported on Form W-2. Additionally, affected taxpayers may be expecting both FICA refunds and Forms W-2c from their employers since this is generally the process when wage and tax overstatements are asserted.
Allowing taxpayers to claim refunds of federal income and FICA taxes, while at the same allowing employers the option of not amending their employment tax returns for years prior to 2013, creates confusion for affected taxpayers and their employers.
What does this mean to employers?
- Benefits for same-sex married couples must comply with the Windsor decision beginning September 16, 2013.
- Employers may wish to make adjustments retroactively but it is not required.
- If employers make adjustments retroactively, they may follow the guidelines outlined in IRS Notice 2013-61.
- If employers make adjustments retroactively to claim a FICA refund because of this issue, they must follow the procedures to claim the refund for both employee and employer and W-2c Forms will be required.
IRS guidance suggests that individuals may amend prior year returns without the employer providing a Form W-2c. This, presumably, means that the individual will be allowed to change their filing from Single to Married Filing Jointly. They may also be allowed to adjust their taxable income by the amount of imputed income related to spousal benefits. However, it is not clear how a Form 1040X with these changes will be processed within the IRS system.
For employers that choose to file claims for refund and issue Forms W-2c, a number of questions remain (see chart) — the answers for which may be included in future IRS guidance. The IRS has said that it expects to add additional FAQs to those that are currently posted on the website www.irs.gov. Until further guidance is issued, employers may rely on the information provided.