The Internal Revenue Service has provided guidance on the monthly transit benefit that was extended in the fiscal cliff deal earlier this month and how employers who paid more than the maximum exclusion limit can fix the discrepancy.
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Section 132(a)(5) of the Tax Code provides that any fringe benefit that is a qualified transportation fringe can be excluded from gross income. A qualified transportation fringe benefit provided by an employer to an employee can include any transit pass, transportation in a commuter highway vehicle between home and work, and qualified parking.
The amount of fringe benefits that may be excluded from gross income cannot exceed $100 a month for a combination of transportation in a commuter highway vehicle and any transit pass, and $175 in the case of qualified parking. Those amounts are adjusted annually for inflation.
Prior to enactment of the American Taxpayer Relief Act earlier this month, the adjusted maximum monthly excludable amount for 2012 for the aggregate of transportation in a commuter highway vehicle and any transit pass was $125, while the adjusted maximum monthly excludable amount for qualified parking was $240. ATRA amended Section 132(f)(2) to increase the maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits to an amount equal to the maximum monthly excludable amount for qualified parking.
Since the tax break had already expired by the time Congress had agreed on a fiscal cliff deal, the amendment was made retroactive, beginning on Jan. 1, 2012, and extending through Dec. 31, 2013.
Rev. Proc. 2013-15 clarifies that the maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits for 2012 is $240. It also specifies that the maximum monthly excludable amount for 2013 is $245, as part of the annual inflation adjustments (see IRS Issues Inflation Adjustments for Latest Tax Rates).
Amounts that are excluded from gross income under section 132 are also excluded from Federal Insurance Contributions Act (FICA) taxes (both Social Security and Medicare) and federal income tax withholding.
To address employers’ questions regarding the retroactive application of the increased exclusion for 2012 and to reduce filing and reporting burdens, in Notice 2013-8 the IRS is also clarifying how the increase applies for 2012 and providing a special administrative procedure for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2012 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2012, and in filing Forms W-2, Wage and Tax Statement.
Before making an adjustment of an overpayment of FICA tax, an employer generally must repay or reimburse an employee for the overcollection amount prior to the expiration of the period of limitations on credit or refund. For FICA taxes overcollected in a prior year, they 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.
An employer repays the employee by direct payment to the employee. Aan employer reimburses an employee by applying the amount of the overcollection against the employee FICA tax which attaches to wages paid by the employer to the employee.
To make employment tax corrections for overpayments (that is, to make adjustments or to claim refunds), an employer uses the “X” form that corresponds to the return being corrected. For example, an employer corrects overreported taxes on a previously filed Form 941 by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. A separate X form must be filed for each taxable period.
For employers who provided transit benefits in excess of $125 per month and less than or equal to $240 per month in 2012, the IRS is providing a special administrative procedure for employers who want to make adjustments for 2012 on the Form 941 filed for the fourth quarter of 2012.
Employers who originally reported excess transit benefits as includible in gross income and wages and withheld income taxes and FICA taxes would normally be required to file Form 941-X for each quarter to correct the error.
Due to the last-minute timing of the fiscal cliff deal legislation and the due dates for Forms 941 for the fourth quarter of 2012 and Forms W-2, and in order to reduce administrative burden, the IRS said it is providing a special administrative procedure for employers that treated excess transit benefits as wages and that have not yet filed their fourth quarter Form 941 for 2012. Employers who want to use this special administrative procedure must repay or reimburse their employees the overcollected FICA tax on the excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941, the IRS noted.
The employer, in reporting amounts on its fourth quarter Form 941, may reduce the fourth quarter wages, tips and compensation reported on line 2, taxable Social Security wages reported on line 5a, and Medicare wages and tips reported on line 5c, by the excess transit benefits for all four quarters of 2012. By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file Forms W-2c.
This procedure can only be used to the extent that employers have repaid or reimbursed their employees for the employee share of FICA tax attributable to the excess transit benefits. Under this special administrative procedure, employers can only correct the employer share of FICA tax that corresponds to the employees’ share of FICA tax that has been repaid or reimbursed to the employees.
Employers using the special procedure do not need to obtain written statements from their employees confirming, for each employee, that the employee did not make a claim (or if the employee did make a claim, the claim was rejected) and will not make a claim for refund of FICA tax overcollected in a prior year.
The repayment or reimbursement of overwithheld Social Security tax and the corresponding reduction for wages reported on Form 941, line 5a, taxable Social Security wages, must take into account that refunds or credits of Social Security tax are limited to the amount paid on that portion of the excess transit benefits that, when added to other wages for the year, did not exceed the Social Security wage base for 2012 ($110,100).
The same procedures are available to filers of other employment tax returns reporting FICA taxes (such as the related Spanish-language return or return for U.S. possessions) and to filers of employment tax returns reporting taxes under the Railroad Retirement Tax Act.
Employers that have filed the fourth quarter Form 941 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing the employees or, for refund claims, securing consents from its employees. Similarly, employers that, on or before filing the fourth quarter Form 941, have not repaid or reimbursed some or all employees who received excess transit benefits in 2012 must use Form 941-X to make an adjustment or claim for refund with respect to the excess transit benefits provided to those employees and must follow the normal procedures.
Employers that have not furnished 2012 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social Security wages; and box 5, Medicare wages and tips.
Employers that have repaid or reimbursed their employees for the overcollected FICA taxes prior to furnishing Form W-2 should reduce the amounts of withheld tax reported in box 4, Social Security tax withheld, and box 6, Medicare tax withheld, by the amounts of the repayments or reimbursements. In all cases, however, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2012. The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040, U.S. Individual Income Tax Return).
Employers that repaid or reimbursed their employees for the overcollected FICA taxes after furnishing Forms W-2 to their employees but before filing Forms W-2 with the Social Security Administration (SSA), should check the “Void” box at the top of each incorrect Form W-2 (Copy A). The employer should prepare new Forms W-2 with the correct information, and send these new Forms W-2 (Copy A) to the SSA. The employers should write “CORRECTED” on the employees’ new copies (B, C, and 2), and furnish them to the employees. Employers that have already filed 2012 Forms W-2 with the SSA will need to file Forms W-2c, Corrected Wage and Tax Statement, to take into account the increased exclusion for transit benefits.