Payroll to Face Burdensome Tax Requirements for Same-Sex Spouses After DOMA Decision

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By Keith M. Hill  


The Labor Department's recent update of Family and Medical Leave Act guidance on same-sex marriages could lead to administrative problems for payroll departments if the Treasury Department and the Internal Revenue Service apply the same rule for federal tax purposes, payroll experts told BNA.

The Wage and Hour Division modified Fact Sheet No. 28F, “Qualifying Reasons for Leave under the Family and Medical Leave Act,” after the June 26 Supreme Court ruling that the Defense of Marriage Act (Pub. L. 104-199) violated the constitutional guarantee of equal protection when applied to same-sex couples legally married under state law (United States v. Windsor, U.S., No. 12-307, 6/26/13). Such couples are entitled to federal benefits under the ruling, which could affect taxable wages, retirement accounts, qualified pension plans, and Social Security benefits.

Labor Day Is Start of National Payroll Week

National Payroll Week, which recognizes the work of payroll professionals and honors American workers, takes place Sept. 2-6.

The weeklong recognition of the role payroll plays in the workforce is part of a campaign to help workers understand the wage-withholding system and their paychecks. American Payroll Association chapters and members make presentations to schools and civic groups, participate in community service initiatives, and help distribute pay-related information. The APA launched the annual event in 1996.

The Canadian Payroll Association holds payroll week Sept. 10-14.

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The fact sheet expanded the definition for spouse with regard to the FMLA: “Spouse means a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including 'common law' marriage and same-sex marriage.”

Applying the laws of an employee's resident state when determining the tax value of same-sex employee benefits for federal tax purposes would “be a nightmare” for payroll departments because most states do not recognize same-sex marriages, payroll consultant Jerri Langer of COKALA Tax Reporting Solutions told BNA Aug. 26. Thirteen states and the District of Columbia recognize same-sex marriage.

Just because the Labor Department ruled in this manner does not mean that IRS has to follow the resident state guidelines, Langer said. However, if IRS were to follow the residency rule, there would be “severe payroll and [human resources] ramifications,” she said.

Following the laws of the state where the marriage occurred would be easier, though still burdensome because the employer would have to determine what constitutes marriage, Langer said. Windsor only applies to same-sex marriages, not civil unions or domestic partnerships.

In some states, domestic partners are spouses for tax purposes, Langer said.

In California, for example, a civil union would not be dissolved for same-sex couples who first enter into a civil union and then a marriage, Langer said. The state, however, would have to determine which ceremony to recognize, she said.

Local issues also would have to be considered if a local jurisdiction passed laws of its own, Langer said.

If the law of the state where the marriage took place holds precedence, however, there would be no reason to challenge a couple's marriage, Langer said.

“No matter how we look at this, it will be a problem for employers across the country,” Langer said.

APA Calls for Tax Relief

For federal tax purposes, applying the law of the state where the marriage took place would be easiest to administer, Michael O'Toole, senior director of government relations with the American Payroll Association, told BNA Aug. 23. The Internal Revenue Service generally has based marriage rulings on state of residence, he said.

Changes to the Social Security Administration's Program Operations Manual System require SSA offices to follow guidelines for defining marital status and provide instructions for determining domicile and duration of marriage, O'Toole said.

IRS would have to issue guidelines on several other issues to make DOMA compliance easier for employers, O'Toole said.

The agency should decide what determines whether a couple is considered married for federal tax purposes, O'Toole said.

IRS also should develop guidance on whether the Windsor decision would apply retroactively and, if so, how far back it would extend, O'Toole said.

For this year, the APA has asked IRS to provide administrative relief to employers that would allow them to make adjustments on the third- and fourth-quarter Form 941, Employers Quarterly Federal Tax Return, rather than on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, O'Toole said.

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