Tax Tips

Is your business entitled to a post-DOMA tax refund?

After the U.S. Supreme Court struck down as unconstitutional the Defense of Marriage Act’s (DOMA’s) definition of “marriage” for federal benefits purposes in June 2013, the IRS issued guidance clarifying that same-sex marriages are now recognized for federal tax purposes. Employers that previously paid FICA taxes on employer-paid health care coverage and certain other benefits for employees’ same-sex spouses may be entitled to a refund.

You can correct FICA overpayments for 2013 on your “Employer’s Quarterly Federal Tax Return” (Form 941) for the fourth quarter of 2013 (due Jan. 31, 2014). For 2013 or earlier years, you may claim a refund anytime before the statute of limitations expires by filing one “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund” (Form 941-X) for the fourth quarter of the year.

Don’t overlook state estate taxes

The exemption for federal gift and estate taxes is more than $5 million, so federal estate taxes may be less of a concern. But state taxes can create a trap, particularly if your estate plan contains an outdated formula clause.

Say your plan includes a 10-year-old formula clause calling for an amount up to the current federal exemption to go into a credit shelter trust, with the balance going to your spouse (shielded from estate tax by the marital deduction). This strategy worked well when states simply adopted the federal exemption. But what if your state’s exemption is only $1 million today, with a 10% tax on the excess?

With a $5 million estate, the formula clause would funnel that amount into a credit shelter trust, triggering a $400,000 state tax liability [($5 million – $1 million) × 10%]. The state tax can be avoided by updating the plan to provide for $1 million to go into the credit shelter trust and the balance to your spouse. In some states there’s another alternative that will allow you to choose the larger amount for federal purposes and the lower amount for state purposes.

Watch out for unpaid interns

If your business uses unpaid (or underpaid) interns, make sure they’re not really employees under federal law. Otherwise, you may be liable for back pay, overtime, payroll taxes and penalties.

Internships should benefit the intern more than the company. To protect yourself from liability, offer interns training they can’t get elsewhere and that’s different from training you provide employees. Have interns acknowledge in writing their understanding that participating in the program doesn’t guarantee them a job, and don’t give them routine work.