Employer needs employee repayment or consent for tax-equalization FICA refund

Plain-English summary

A multinational employer used a tax-equalization agreement that reduced an employee's stated salary and required the employer to pay the employee's United States and foreign taxes. The employer later sought a refund of excess FICA tax paid for the employee in a year after the wages were paid. Chief Counsel advised that taxes paid under this arrangement are treated as additional income and wages to the employee and as having been withheld from the employee, even if the employer's bookkeeping shows the payments coming from its own funds. As a result, the employer generally cannot obtain the FICA refund without first repaying or reimbursing the employee's share or obtaining the employee's consent to the refund claim. The employer must follow the employee-protection procedures in Treas. Reg. § 31.6402(a)-2 and Revenue Procedure 2017-28. Limited exceptions for taxes not withheld from an employee do not apply to the tax-equalization arrangement described.

Ruling snapshot

• Question: May an employer recover excess FICA tax under a tax-equalization arrangement without reimbursing the employee or obtaining the employee's consent?
• Outcome: Advice given: generally no, because the employee's share is treated as withheld from the employee
• Key authorities: IRC §§ 3101, 3111, 3121(a), 6402, and 6413; Treas. Reg. §§ 31.6402(a)-2 and 31.6413(a)-1 through -2; Rev. Rul. 86-14; Rev. Proc. 2017-28

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           memorandum
           Number: 202323005
           Release Date: 6/9/2023
           CC:EEE:EOET:ET2:MLeiwant
           POSTN-109588-23

 UILC:     6402.00-00, 6413.00-00

  date:    May 08, 2023

     to:   Jeremy H. Fetter
           Area Counsel (Gulf Coast Area Dallas)
           (Tax Exempt & Government Entities Division Counsel)

  from:    Mikhail Zhidkov
           Senior Technician Reviewer
           Employment Tax Branch 2
           (Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and
           Employment Taxes) CC:EEE:EOET:ET2)


subject:   Refund of Overpayment of Taxes Imposed Under the Federal Insurance Contribution
           Act in a Subsequent Year Following the Use of Tax Equalization Methods

           This Chief Counsel Advice responds to your request for assistance. This advice may not
           be used or cited as precedent.


           ISSUE

           Whether an employer is eligible to receive a refund for an overpayment of tax imposed
           by the Federal Insurance Contributions Act (FICA) paid on behalf of an employee on a
           foreign assignment in a year after the calendar year in which wages were paid without
           the employer first repaying or reimbursing the employee the employee’s portion of
           social security tax or securing the employee's consent to the allowance of the claim for
           refund in a situation where the employer uses a tax equalization program to adjust the
           employee’s pay.

           CONCLUSION

           Generally, in order to receive a refund for an overpayment of FICA tax, an employer
           must repay or reimburse its employee the employee’s portion of FICA tax or secure the
           employee's consent to the allowance of the claim for refund and include the consent
POSTN-109588-23                                     2

together with a claim for the refund of such employee tax in accordance with Rev. Proc.
2017-28, 2017-14 I.R.B. 1061. This is true where an employer uses a tax equalization
program to adjust employee’s pay because FICA taxes are considered withheld from
the employee’s wages in this situation.

BACKGROUND1

Companies with a multinational presence often station employees in countries other
than the employee’s country of citizenship or residence. When doing so, these
companies frequently offer tax equalization programs to employees. Tax equalization
programs are agreements entered into between employers and employees and are
intended to result in the employee having no economic gain or loss with respect to tax
liability because of the international assignment. After all expected taxes are
considered, an employee may be better or worse off economically because of the
international assignment if an adjustment to salary is not made. The tax equalization
program is designed to result in the employee paying approximately the same amount
of tax as the employee would have paid had the employee not been placed on an
international assignment.

Under the tax equalization process, a company will enter into a tax equalization
agreement with its employee prior to stationing the employee in a new country. As part
of the tax equalization agreement, the company and the employee will calculate what is
commonly referred to as a “hypothetical tax.” The hypothetical tax calculation made
before the beginning of the tax year constitutes an approximation of what the
employee’s overall tax liability would be for the upcoming year if that employee were to
remain in the employee’s country of citizenship (approximate hypothetical tax). The
employee’s previously agreed upon salary for the upcoming year is then reduced by the
amount of this approximate hypothetical tax, and the employee is not entitled to receive
that portion of the employee’s previously agreed upon salary. The company will then
usually pay all taxes owed on remuneration the employee receives from that company
on behalf of the employee for both the country where the employee is stationed (host
country) as well as the employee’s country of citizenship.

For employees stationed in the United States, or United States employees stationed
abroad, the company will generally remit FICA taxes owed on remuneration the
employee receives and file quarterly Forms 941. The company will also show the
employee’s share of FICA tax as Social Security and Medicare tax withheld in boxes 3
and 5 of the employee’s Form W-2 it files and furnishes to the employee after the end of
the calendar year.




1 This section provides a general overview of the tax equalization process as background. The particulars

of each tax equalization scheme vary from company to company, but the legal determination detailed in
this document is not dependent on the particular facts and circumstances described in this section.
POSTN-109588-23                                      3

FACTS

A United States company sends a non-United States citizen employee on international
assignment to the United States and pays the employee remuneration subject to FICA
taxes under §§ 3101 and 3111. Under the company’s tax equalization program, the
company agrees in advance of the international assignment to pay the employee a
stated amount of remuneration, net of any taxes owed on the remuneration, which is
intended to equal the after-tax remuneration the employee would receive if they had
remained in the employee’s country of citizenship instead of accepting a foreign
assignment. The United States company reduces that employee’s salary by the
approximate hypothetical tax and pays the required FICA taxes throughout the year in
which remuneration is paid to the employee. Under the agreement, after the
hypothetical tax is subtracted from the employee’s pay, the employer purports to be
solely responsible for paying taxes, including FICA taxes, on tax equalized pay, without
subtracting any additional amount from the agreed upon remuneration or later adjusting
such pay.

The issue presented is whether the United States company that pays the employee’s
share of FICA tax withholding in excess of what should have been withheld is entitled to
claim a refund of the excess withholding in a year subsequent to the calendar year in
which the remuneration that gave rise to the United States tax liability was paid to the
employee without first repaying or reimbursing the employee the employee’s share of
FICA tax or securing the employee's consent to the allowance of the claim for refund.

LAW

Sections 3101 and 3111 impose taxes under FICA on “wages” as that term is defined in
section 3121(a), with respect to “employment” as that term is defined in section 3121(b).
The term “wages” is defined in section 3121(a) as all remuneration for employment, with
certain specific exceptions. Section 3121(b) defines the term “employment” as any
service, of whatever nature, performed by an employee for the person employing him,
with certain specific exceptions. Neither the exceptions in section 3121(a) nor (b) are
relevant to tax equalization programs.2

Section 3121(a)(6)(A) excludes from wages the payment by an employer (without
deduction from the remuneration of the employee) of the tax imposed upon an
employee under section 3101 with respect to remuneration paid to an employee for
domestic service in a private home of the employer or for agricultural labor.

Generally, an employer may correct overpayments of FICA tax after an error has been
ascertained using the refund claim process under section 6402 or using the adjustment

2 As discussed further below, section 3121(a)(6)(A) excludes from wages an employer’s payment of the

employee’s share of FICA for domestic service in a private home or for agricultural labor. To the extent
tax equalization programs include agricultural or household employees, section 3121(a)(6)(A) could
apply. This memo does not analyze such situations.
POSTN-109588-23                               4

process under section 6413. An error is ascertained when the employer has sufficient
knowledge of the error to be able to correct it.

Section 6402 establishes the procedures for filing claims for refund. Section 6402(a)
provides, in part, that in the case of any overpayment, the Secretary may credit the
amount of such overpayment against any tax liability of the person who made the
overpayment and shall refund the balance to such person.

Section 31.6402(a)-2 provides rules under which a refund claim for an overpayment of
FICA tax may be made. Pursuant to § 31.6402(a)-2(a), no refund or credit for FICA
employer tax will be allowed unless the employer has first repaid or reimbursed its
employee for the employee FICA tax or has secured the employee's consent to the
allowance of the claim for refund and includes a claim for the refund of such employee
tax. For refund claims for employee tax overcollected in prior years, the employer must
also certify that it has obtained the employee’s written statement confirming that the
employee has not made any previous claims (or the claims were rejected) and will not
make any future claims for refund of the amount of the overcollection. However, this
requirement does not apply to the extent that the employee FICA taxes were not
withheld from the employee or, after the employer makes reasonable efforts to repay or
reimburse the employee or secure the employee's consent, the employer cannot locate
the employee or the employee will not provide consent.

Section 6413(a)(1) generally provides for interest-free adjustments in such manner and
at such times as the Secretary prescribes by regulation if more than the correct amount
of tax imposed by §§ 3101, 3111, 3201, 3221, or 3402 is paid with respect to any
payment of remuneration.

Section 6413(b) generally provides for a refund if an overpayment cannot be adjusted
under § 6413(a) in such manner and at such times as the Secretary prescribes by
regulation if more than the correct amount of tax imposed by §§ 3101, 3111, 3201,
3221, or 3402 is paid with respect to any payment of remuneration.

Section 31.6413(a)-1(a) and Section 31.6413(a)-2 generally provide procedures for the
interest-free adjustments of overpayments of FICA tax withheld from wages. Under
section 31.6413(a)-1(a) and section 31.6413(a)-2(b) of the Treasury regulations, before
making an adjustment of an overpayment of FICA tax with respect to an employee, an
employer generally must repay or reimburse the employee in the amount of the over-
collection prior to the expiration of the period of limitations on credit or refund, and, for
FICA tax overcollected in a prior year, must also secure the employee's written
statement confirming that the employee has not made any previous claims (or the
claims were rejected) and will not make any future claims for refund or credit of the
amount of the overcollected FICA tax.

Under § 31.6413(a)-2(c)(2), an employer can correct an overpayment of income tax
withholding due to an administrative error. An administrative error involves the
POSTN-109588-23                                    5

inaccurate reporting of the amount withheld due to transposition error or math error on
the employment tax returns

Under § 3509(a), if any employer fails to deduct and withhold any tax under subchapter
A of chapter 21 with respect to any employee by reason of treating such employee as
not being an employee for purposes of such subchapter, the amount of the employer’s
liability for such taxes with respect to such employee shall be determined as if the taxes
imposed under such subchapter were 20 percent of the amount imposed under such
subchapter without regard to this subparagraph. Section 3509(d)(1)(B) provides that the
employer shall not be entitled to recover from the employee any tax determined under
this section.

In First National Bank of Chicago v. United States, 964 F.2d 1137 (Fed. Cir. 1992), the
Court considered whether an employer was required to comply with procedural
requirements for claiming a refund of FICA taxes when the taxes were paid by the
employer and the payment of the FICA taxes did not itself result in additional FICA
wages because of a statutory exception then applicable. The court held that only FICA
wages to an employee could be “collected from an employee” for purposes of the
regulations. The court then reasoned that because the FICA taxes were paid by the
employer on behalf of the employees, and because the payments the employer made
on behalf of the employee were exempted from FICA under § 3121(a)(6)(A),3 the
payments were not FICA wages. The court noted that, “[g]enerally, income taxes and
FICA taxes are considered to have been ‘collected from an employee’ even though the
employee has not in fact ever received the amount of the tax.” However, since the
payments in this case were “never income which could have been included in and then
deducted from the employees’ FICA wages,” they could not be “collected from an
employee,” so no collection occurred, and the employer was not subject to the
procedural requirements for claiming a refund of FICA taxes.

Rev. Rul. 86-14, 1986-5 C.B. 304, determines that FICA tax payments that are made on
an employee’s behalf are generally additional income to the employee and should be
reported as additional wages.4 The ruling also states that any FICA payments made on
an employee’s behalf should be reported as “Social Security Tax Withheld” on the Form
W- 2. Finally, the ruling states that when a tax liability is incurred by an employer on
behalf of an employee and those funds are included in the employee’s gross income,
the funds were, in effect, deducted from the employee's pay.

Rev. Proc. 2017-28 provides guidance to employers on the requirements for employee
consent used by an employer to support a claim for refund of overpaid taxes under

3 The Omnibus Reconciliation Act of 1980 amended this exception to cover pay only for domestic

services in the employer's home and for agricultural labor. See Omnibus Reconciliation Act of 1980,
Pub.L. 96–499. The payments in question in this case were all made before the 1980 amendment
became effective.
4 Consistent with the Omnibus Reconciliation Act of 1980, Rev. Rul. 86-14 does not apply to payments

that are for domestic service in the employer’s private home or for agricultural labor.
POSTN-109588-23                                     6

FICA. It clarifies the basic requirements for both a request for employee consent and for
the employee consent and permits employee consent to be requested, furnished, and
retained in an electronic format. It also contains guidance concerning what constitutes
“reasonable efforts” if employee consent is not secured in order to permit the employer
to claim a refund of the employer share of overpaid FICA.

ANALYSIS

In the tax equalization program described, the United States company contractually
agrees to withhold FICA taxes on all wages or payments for services that are paid to the
employee by the employer under §§ 3101, including taxes paid on the employee’s
behalf. The employee similarly agrees to the reduced salary in exchange for the United
States company paying all of the employee’s taxes owed on remuneration the employee
receives from that company in both the United States and in the employee’s country of
citizenship. Thus, the employer has a prearranged contract to pay an amount of stated
wages to the employee net of any tax withholding (and thus, as a matter of internal
bookkeeping, pay the tax withholding of the employee out of its own funds rather than
deducting the withholding from the employee’s stated wages in the year of payment).

This prearranged plan results in additional current income and current wages to the
employee in addition to the stated wages. See Rev. Rul. 86-14. The amount of taxes
paid on behalf of the employee by the United States employer is deemed to have been
withheld by the United States company and should be included in income and wages on
the employee’s Form W-2, unless otherwise excepted. See Rev. Rul. 86-14.

To the extent that the employer pays an amount of FICA tax in excess of the sum due
under §§ 3101 or 3111, the employer can file a claim for credit or refund for an
overpayment. See § 31.6402(a)-2(a)(1)(i). However, an employer may not generally
receive a refund of overpaid FICA tax without making reasonable efforts to protect its
employees’ interests with respect to Old-Age, Survivors, and Disability Insurance.5 For
this reason, the employer must first repay or reimburse its employee or secure the
employee’s consent to the allowance of the claim for refund before filing a claim for
credit or refund for an overpayment. See § 31.6402(a)-2(a)(1)(ii). However, this
requirement does not apply to the extent that the taxes were not withheld from the
employee, or, after the employer makes reasonable efforts to repay or reimburse the
employee or secure the employee's consent, the employer cannot locate the employee
or the employee will not provide consent. See § 31.6402(a)-2(a)(1)(ii).

Generally, the employee’s share of FICA taxes is considered to be withheld from the
employee in tax equalization arrangements. While there are some limited circumstances
when FICA taxes are not withheld from the employee, they are not relevant to the tax
equalization agreements being discussed here. For example:


5 This requirement also aids in proper tax administration by preventing a claim for refund by an employee

on the same overpayment of FICA taxes claimed by the employer.
POSTN-109588-23                             7

   •   Amounts that are reported as withheld due to administrative error fall into the
       exception to the requirement that the employer reimburse its employee or secure
       an employee’s consent before receiving a credit or refund for an overpayment of
       FICA taxes. See § 31.6402(a)-2, 31.6413(a)-2(c)(2).
   •   When the Code explicitly deems FICA taxes paid by an employer to be not
       withheld from an employee, those payments are not considered to be withheld
       from the employee. See § 3509(d)(1)(B).
   •   When an employer pays FICA taxes on behalf of an employee but neither the
       underlying benefits that generated the FICA tax liability nor the tax payments the
       employer made on behalf of its employees could be included in and then
       deducted from wages under § 3121, then those FICA tax payments were not
       withheld from the employee. See First National Bank of Chicago, 964 F.2d at
       1140-1.
   •   In cases where an employer makes a payment of the employee’s portion of FICA
       taxes without deduction from the remuneration of the employee or a payment
       required from an employee under a State unemployment compensation law with
       respect to remuneration paid to an employee for domestic service in the
       employer’s home or for agricultural labor, the employer’s payment of FICA taxes
       is not considered to be withheld from the employee. See § 3121(a)(6).

In the tax equalization agreements being discussed, the tax payments made on behalf
of an employee are included in the employee’s gross income, even if the accounting
processes used by the United States company under its tax equalization program do
not identify the payments as being withheld because the employee has agreed to
accept a lower salary in advance in exchange for the employer’s agreement to pay all
taxes on the employee’s behalf. For this reason, regardless of any internal accounting,
the taxes paid on the employee’s behalf are deemed to have been withheld from the
employee. See Rev. Rul. 86-14. The United States company therefore does not fall into
the exception to the requirement to reimburse its employee or secure an employee’s
consent before receiving a credit or refund for an overpayment of FICA taxes because
the tax liability incurred on behalf of an employee is included in the employee’s gross
income. See § 31.6402(a)-2(a)(1)(ii). This exception only applies to situations in which
taxes were not withheld from the employee. In this case, the payments are deemed to
be withheld. Excess FICA taxes withheld by an employer may be recovered through a
claim for credit or refund only after the employer first repays or reimburses its employee
or secures the employee’s consent to the allowance of the claim for refund. See §
31.6402(a)-2(a)(1)(ii).

Please call Matthew Leiwant at (202) 317-4774 if you have any further questions.