On January 16, 2013, the Internal Revenue Service (IRS) issued Notice 2013-8 providing a special administrative procedure for employers with respect to 2012 transit benefits. Under Section 132(f) of the Internal Revenue Code of 1986, as amended (the Code), all "qualified transportation fringe" benefits are excluded from gross income, which includes employer-provided transportation in a commuter highway vehicle between home and work and transit passes (collectively, Qualified Transit Benefits) and qualified parking.
The American Taxpayer Relief Act of 2012 (ATRA) provides parity for the monthly excludable amount for Qualified Transit Benefits to the monthly excludable amount for qualified parking. Before the enactment of the ATRA, the amount of excludable transit fringe benefits was $125 per month for Qualified Transit Benefits and $240 for qualified parking. The ATRA retroactively increased the monthly transit benefit exclusion for Qualified Transit Benefits to $240 per participating employee for the 2012 calendar year (i.e., this provision is effective retroactively beginning January 1, 2012). The "qualified transportation fringe" benefit limit (for both Qualified Transit Benefits and qualified parking) increased to $245 for 2013.
Notice 2013-8 also addresses employers' questions regarding the retroactive application of the increased exclusions, which can result in both decreased FICA and federal income tax liability. Employers acting promptly, in most cases by January 31, 2013, may have less administrative burden in obtaining a benefit for themselves and their employees with respect to the retroactive increase for Qualified Transit Benefits.
Form 941
Employers that included excess Qualified Transit Benefits in gross income and wages, but have not yet filed their fourth quarter Form 941 (Employer's Quarterly Federal Tax Return) for 2012 should do the following:
- repay or reimburse their employees the over-collected FICA tax on the excess Qualified Transit Benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941
- reduce the fourth-quarter wages, tips and compensation reported on line 2, the taxable Social Security wages reported on line 5a and Medicare wages and the tips reported on line 5c by the excess Qualified Transit Benefits for all four quarters of 2012, and
- take into account the 2012 Social Security wage base limit of $110,100.
The above procedure will allow employers to avoid having to file Forms 941-X and possibly, Forms W-2c.
Employers that have already 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 Qualified Transit Benefits after repaying or reimbursing the employees (or for refund claims, securing consents from its employees). Employers that have not repaid or reimbursed the employees who received excess Qualified Transit Benefits in 2012 on or before filing the fourth-quarter Form 941 must (i) use Form 941-X to make an adjustment or claim for refund with respect to the excess Qualified Transit Benefits provided to those employees and (ii) follow the normal procedures.
Forms W-2
In all cases, 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 who have not furnished 2012 Forms W-2 to employees should take into account the increased exclusion for Qualified 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 who already filed 2012 Forms W-2 with the U.S. Social Security Administration need to file Forms W-2c (Corrected Wage and Tax Statement) to take into account the increased exclusion for Qualified Transit Benefits.
- Employers that have repaid or reimbursed their employees for the over-collected 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.
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