The American Taxpayer Relief Act of 2012 (the Act) retroactively increased the 2012 monthly income exclusion for employer-provided mass-transit and vanpool benefits from $125 to $240. The exclusion applies for the purposes of FICA (Social Security and Medicare) taxes as well as income tax.
In Notice 2013-8 (the Notice), the IRS announced procedures for employers to follow as to FICA taxes that were withheld on account of monthly transit benefits paid to any employee in 2012 that exceeded $125 per month, but were less than or equal to $240 per month (excess transit benefits). The Notice applies to excess transit benefits provided either from employer funds or through a salary reduction arrangement.
Special Administrative Procedure for Certain Employers
The Notice provides a special administrative procedure for employers who
- have not yet filed Form 941 (Employer’s Quarterly Federal Tax Return) for the fourth quarter of 2012; and
- have repaid or reimbursed employees for FICA taxes on excess transit benefits.
These employers may use the fourth quarter Form 941 to account for the increased amount excludable from wages and the resultant decrease in FICA taxes for all quarters in 2012. They may reduce amounts reported on this Form 941 as wages, tips and compensation (Line 2) and taxable Social Security and Medicare wages (Lines 5a and 5c) by the total amount of excess transit benefits paid in all quarters of 2012.
The Notice provides that under the special administrative procedure, employers may 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.
An employer repays an employee by direct payment to the employee. An employer reimburses an employee by applying the amount of the overcollection against the employee FICA tax on wages paid by the employer to the employee. The amount repaid or reimbursed must be limited if necessary to account for the Social Security wage base, which was $110,100 in 2012.
Procedure for Other Employers
An employer that is not eligible to use the special administrative procedure will need to correct the overcollection of FICA taxes in 2012 on excess transit benefits using the adjustment procedure in Section 6413 of the Internal Revenue Code. This involves the following steps:
- Repaying or reimbursing the affected employee in the amount of the overcollection.
- Securing 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.
- Filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for each quarter in 2012 that there was an overcollection.
The Forms 941-X will also be used to correct the overpayment of the employer’s share of FICA taxes on excess transit benefits for employers who cannot use the special administrative procedure.
Income Taxes Withheld on Excess Transit Benefits
Income tax withheld from an employee’s wages on account of excess transit benefits cannot be corrected or adjusted on Forms 941 or 941-X. The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return.
2012 Forms W-2
The Notice provides the following guidance as to accounting for excess transit benefits on 2012 Forms W-2, Wage and Tax Statement:
- An employer that has not yet furnished Forms W-2 to its employees or to the Social Security Administration (SSA) should in all cases account for the excess transit benefits by reducing the amounts reported as wages, tips and compensation (Box 1) and taxable Social Security and Medicare wages (Boxes 3 and 5) to reflect the additional exclusion provided by the Act.
- An employer that has repaid or reimbursed FICA taxes before furnishing Forms W-2 should reduce the amounts reported on those forms as withheld Social Security and Medicare tax (Boxes 4 and 6). Employers should report the actual amount of withheld income tax in Box 2.
- An employer that repaid or reimbursed its employees for the overcollected FICA taxes after furnishing Forms W-2 (Copies B, C and 2) to its employees, but before filing Forms W-2 with the SSA, should check the “Void” box at the top of each incorrect Form W-2 (Copy A). Such an employer should prepare new Forms W-2 with the correct information and send these new Forms W-2 (Copy A) to the SSA. The employer should write “CORRECTED” on the employees’ new copies (B, C, and 2), and furnish them to the employees.
- An employer that has already filed 2012 Forms W-2 with the SSA that do not take into account the retroactive increased exclusion for transit benefits will need to file Forms W-2c, Corrected Wage and Tax Statement.
For further information, please contact either of the authors of this article, Jessica Sackin and Larry Goldstein, or any other members of the McGuireWoods employee benefits team.