Payroll Issues of Domestic Partnerships

HR Resource
July 23, 2012 — 1,748 views  
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The definition of a domestic partnership varies depending on the state, but it is basically a personal relationship that involves individuals who are not bound by marriage or civil union, but who reside together and are legally recognized as a unit by the government. In some states, domestic partnerships have very similar rights to individuals who are married, while in other states, they have fewer rights than those who are in civil unions.

The laws surrounding domestic partnerships are continuously evolving, as more people are beginning to identify themselves as domestic partners. These laws are meant to provide protections to domestic partners, such as the right to use sick leave to care for a partner, inherit from a partner's estate, make medical decisions for an incapacitated partner, obtain health insurance through a partner and so on.

According to Arlen Group, the value of employer-provided domestic partner healthcare coverage typically must be included in the earned income of the employee for Federal income tax purposes. When a domestic partner is not recognized as a dependent, employers are required to report the value of the employer-provided coverage to the employee as imputed income.

Imputed income is the estimated value of the employer's financial contribution toward health insurance coverage. This coverage is providing for non-dependent, sometimes same-sex partners and must be reported as taxable wages earned. The source states that this imputed income can be reported on employee paychecks incrementally or one time on the W-2 Form.

In terms of payroll reporting obligations, employers should keep in mind that the value of domestic partner coverage may not be subject to Federal income payroll taxes if the domestic partner is recognized as a common-law spouse or is an IRS qualified dependent.

The problem is, the imputed income increases the employee's overall taxable income but also increases the employer's payroll taxes. According to the Human Rights Campaign, a report from CAP/Williams Institute reveals that employers collectively pay a total of $57 million per year due to this unequal tax treatment in additional payroll taxes. Therefore, because domestic partnership and payroll tax laws vary by state, employers should work with payroll professionals and tax counsel to ensure reports and deductions are made properly.

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