Adding Same-Sex Spouses & State Tax Implications

Hi Ruth. We are looking at the same issues as we have offices in over 40 states. Have you contacted BSI? Taxation is their area but I'm not sure what if any interface changes would be needed. We're contacting BSI now but the more clients that raise the issue, the more likely we'll get an acceptable answer.

Ruth, to deal with the different federal and state taxability of benefits for same sex couples with a marriage certificate, create a new pay code and assign it to the PIK pay summary group relationship(pr20.3), set the supplemental tax code to US Exempt(pr20.2), use a calculation type of noncash income(pr20.4), and set the state tax pay code for the applicable states(e.g. Kentucky, Indiana, and Ohio) to taxable on the tax exemptions panel(pr20.5). The amount assigned to the new pay code is equal to the after tax and imputed income, which offsets the pre-tax deduction now required for federal purposes, and should be added on pr30. The pay calc simulator(pr80) will give you the same state taxable amount the employee currently has, provided you shut down any pre-tax savings plan deduction for testing purposes, which would change the basis. Let me know if you have any problems.

Thank you, I think I had it part way; but I think your solution sounds better. In test (I am still testing), I did set up a new imputed pay code on the PR20.4 and tied it to the PR20.5 but used US Regular on the PR20.2, and then on the PR20.5 I added the taxable buckets that it was exempt from. Then I had to figure out what to do with the pre-tax insurance deduction since it needs to be taxed differentially for federal (pre-tax) and Wisconsin (post-tax). I did find that you can change the deduction on PR05 to have a tax status of “X” and then attach a PR05.2 (taxable wages table) to control which taxable buckets you want; but I fear this may cause problems with section 125 reports (like PR294). 

So can I clarify what I think you are saying about the set up please? So you have an imputed pay code flagged as US exempt on the PR20.2, and then it is tied to the taxable states on the PR20.5 (which includes SUTA), and then the insurance deduction is set as a pre-tax deduction (all tax authorities are exempt), and then you add the amount of the pretax deduction to the state imputed pay code amount and the bumped up combination amount is all state authority taxed, but not federal authority taxed (which excludes FICA). Is that correct?  When you add the insurance deduction amount to the imputed pay code though, aren’t you increasing gross pay?  Does the PR290, 291, 292, 294 and 297 come out OK? And when are you putting this into effect, 09/16/2013? And are you doing a retro repair for the taxable buckets and taxes to 01/01/2013?   I appreciate all your help!

I have a business outside of my day job - Income Tax prep - so I asked the lead attorney at Iowa State Center for Ag Law and Taxation (Roger McEowen) for his take on this issue - with the following reply:

  A website toward the lower half of this e-mail will assist in identifying which states have adopted same sex marriage, community property, recognized civil unions, registered domestic partnerships or other legal relationships.  The “Windsor” decision only impacts the “same sex marriage” union.  Per Revenue Ruling 2013-17, for federal tax purposes, the IRS adopts a general rule recognizing a marriage of same sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of the same sex marriage.

      You stated your payroll encompasses 24 states, so regardless of whether the state recognizes same sex marriage or not the federal treatment will be the same as long as it is a valid marriage. Pre-tax basis for federal purposes is allowed.

      Each state tax situation will need to be analyzed to determine how benefits will be impacted at the state level.  At this time, IRS has only been able to identify which states recognize and allow “same sex” marriage and has not researched further how each individual state will be addressing the issue you have presented.

      I was able to find a few resources for Minnesota, Rhode Island, Wisconsin, New York and New Jersey, as noted below.

 States Respond to IRS Same-Sex Marriage Guidance

In response to the IRS (Rev. Rul. 2013-17), Minnesota, Rhode Island, and Wisconsin have issued guidance regarding the tax treatment of same-sex married couples. A control and click will link you to guidance provided.

Map by State

http://en.wikipedia.org/w...ited_States_by_state

New York  http://www.mondaq.com/uni...nd+Employee+Benefits

New Jersey
http://lgbt-vmmlegal.com/...-same-sex-marriages/

Bonnie, it may be beneficial to go through an example.  Prior to the DOMA ruling, we had a pre-tax and post-tax deduction for medical which was manually added to pr14, along with an imputed income amount on pr30(the deductions were set up on pr14 instead of bn32 since this is a manual process, although it is possible to specify both pre and post-tax amounts on bn15, but you still need to add imputed income separately.)  To simplify the math, we'll assume a pre-tax deduction of $50 and post-tax of $25(total medical deduction of $75), with imputed income of $60.  After DOMA, we set up a pre-tax deduction of $75 on bn32, comparable to other employees enrolling in a medical plan.  The only difference for the same sex couple is we add the post-tax amount of $25 and imputed income amount of $60 and assign the $85 to the new pay code on pr30, which is only added to state tax based on pr20.5. From a federal perspective the same sex couple is processed the same as any other employee.  The new pay code is added to adjust just the state taxable portion.  The reports you mention should be ok because a same sex couple is being processed just like anyone else, except the state taxable amount is adjusted upward based on the new pay code amount.  If we assume $1,000 gross pay, prior to DOMA the federal and state taxable amount would both be $1,010(1,000 - 50 + 60).  After DOMA the federal taxable amount is $925(1,000 - 75) and the state is still $1,010(1,000 - 75 + 85).

Thank you so much, the example is really helpful.  Couple things yet.
1.)  If I set the PR20.2 to US Exempt and the PR20.5 to "T" for taxable; then I do get taxable wages for state, but no state income taxes are withheld (for WI or SUTA).  We want taxes deducted too.  So I can set the PR20.2 to US Regular and the PR20.5 to "E" (exempt federal authorites).  It works fine then.
2.)  And I am exempting FUTA and taxing SUTA. Did you set it up that way as well?
3.)  Are you repairing taxable and taxes for 2013 through payroll?  Or starting at the marriage date if the marriage was in 2013?
4.)  We have health and dental.  I assume dental is also DOMA?

Thank you!  Bonnie

Bonnie, I apologize for the delay in responding.  You are correct regarding the taxable only for state, with no withholding being taken.  I'm not sure why the design would be to intentionally underwithhold, but that's the spec.  I've changed the attributes from US Exempt to US Regular on pr20.2 and excluded federal tax, FUT and FICA(T101-T103 & C101-C103) on pr20.5.  We have implemented the change on a prospective basis as of 10/1.  We're not aware of any guidance regarding adjustments for the withholding/taxes prior to 10/1.  You are also correct regarding DOMA for dental.  Our dental does not have a company subsidy so there is no imputed income, just the before tax/after tax split.  To get the amount for the new pay code I added together the imputed income from the medical and the after tax amounts from medical and dental.  Let me know if you want to discuss further.  Thanks.

How is the imputed income calculated? I've seen a couple of examples, but they involved knowing the employees tax rate and I'm wondering how that is monitored?
Does anyone have a spreadsheet built that can be used to help with the calculations?