Payroll Errors Are Worth Thousands for Same-Sex Couples

Filing your own tax returns is confusing enough. But the process can be even more bewildering for gay and lesbian couples in civil unions and marriages. This is doubly true when their own employers aren’t clear on how differences between state and federal tax codes affect their withholdings.

For the last decade, the payroll system for the Vermont State Colleges [1]wasn’t accounting for the fact that some of its 2000 employees are gay or lesbian and provide their partners with health care benefits. Twenty-nine former and current Vermont State Colleges staffers were notified in a February 16 letter from the chancellor’s office that the automated payroll system wasn’t set up properly to process contributions to their partners’ medical and dental policies as a pre-tax withholding.

Those letters were followed shortly thereafter by checks to reimburse them for the state taxes the couples improperly paid during the years their partners received VSC health and dental insurance benefits.

Under Vermont’s civil-union law, which took effect on July 1, 2000, any employment benefit afforded to same-sex partners in a civil union must be treated the same way as those given to heterosexual couples. Vermont’s gay-marriage law, enacted last year, included the same requirement. And, under Vermont’s tax code, health benefits provided to spouses and dependents are treated as nontaxable income.

“We made a mistake,” says VSC chancellor Tim Donovan [2]. “We wish that it hadn’t happened, but we’re glad someone found it.”

According to Donovan, the problem was discovered in early February by a current VSC employee who notified the human resources department when her tax preparer found the error on her 2009 W-2 form. When the VSC staff looked into the matter, they realized that this wasn’t an isolated mistake. Apparently, the payroll software VSC has been using for the last decade was never changed in 2000, the first year for which civil-union partners had to file joint state tax returns.

Although Donovan isn’t sure, he suspects that the problem may have occurred because the federal government doesn’t recognize civil unions or same-sex marriages. As a result, the feds treat any benefits provided to same-sex partners as taxable “income.”

“When this came to my attention, my response was, ‘Let’s get on this immediately, let’s have good communication and let’s make these people whole,’” Donovan says. Within weeks, new W-2 forms were sent out, as were the refund checks. In one case, a Johnson State College [3] employee was reimbursed $4300 for her partner’s civil-union benefits that date back to 2000.

In all, VSC paid out more than $22,000, which, according to Donovan, came out of VSC’s general budget, not the state’s general fund. The budgets for the five state colleges where the employees work were not affected, he notes.

How did the problem go undiscovered for this long? Donovan doesn’t know, since he wasn’t chancellor back in 2000. Moreover, he points out that this particular group of employees isn’t one the system ordinarily looks at in isolation.

“Not to point fingers, but the first thing that surprised me was that no employee in eight years noticed this, either,” he says.

Meanwhile, the exact opposite problem has arisen with gay and lesbian employees of the Franklin Central Supervisory Union [4], which realized a month ago that it, too, was calculating its payroll incorrectly. In that case, however, FCSU realized that under federal law, it was supposed to be treating health benefits for same-sex partners as taxable income. It considered gay and lesbian couples the same as hetero ones.

Two weeks ago, a memo went out to all Franklin Central Supervisory Union employees notifying them that, for federal withholding purposes, their payroll system wasn’t set up correctly, either. And that, says superintendent Bob Rosane [5], has created “an administrative nightmare.”

“Apparently, we were supposed to be doing this since 2001,” Rosane says, explaining that his staff “stumbled upon this” mistake recently while speaking to someone at the U.S. Internal Revenue Service about an unrelated matter. “We’d been deducting for parties to a civil union the same way as for a [heterosexual] married couple.”

“We’re not quite sure how to take care of it,” he added, “but we’re trying our hardest.”

Rosane couldn’t say how many of his employees will be affected by this change, though he did acknowledge that “it’s frustrating because it feels like a penalty” to his gay and lesbian staff.

Indeed, at least one employee of the Franklin Central Supervisory Union voiced anger at the discovery, since she’ll now be taxed more than her cohorts for the benefits her lesbian partner receives.

“My contract at this school no longer feels equal to my counterparts’,” says this employee, who asked not to be identified because her grievance is still being reviewed by her union rep. “If I earn exactly the same thing as the person in the next classroom and she’s also covering a spouse, I get more tax taken out.”

How many other Vermont employers might also be making similar errors in their withholdings for their gay and lesbian employees? Richard Westman [6], commissioner of the Vermont Department of Taxes, says that he wasn’t aware of the problems at the Vermont State Colleges or the Franklin Central Supervisory Union. But that’s not unusual, he points out, since employers aren’t required to inform the state about withholding errors as long as they correct the matter themselves and file the appropriate forms.

“It’s a minefield of complexity,” says Colleen Montgomery [7], a certified public accountant who co-owns Montgomery & Merrill PC [8] in Burlington. “It is complicated to tax someone differently for federal tax than for state. And, of course, it is impossible to make those people feel as if they’ve been treated fairly.”