Retroactive Increase in Excludible Transit Benefits for 2012
Prior to the enactment of the American Taxpayer Relief Act (ATRA), the maximum amount excludible for the aggregate of transportation in a commuter highway vehicle and any transit pass (referred to as “transit benefits”) for 2012 was $125 per month. The American Tax Relief Act increased the maximum transit benefit exclusion to $240 per month retroactive to January 1, 2012. The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements.
The IRS issued Notice 2013-08 to provide guidance to employers on how to account for the retroactive change when filing Forms 941 and W-2. The notice provided a special administrative procedure that allowed employers to account for the increased excludable transit benefits they provided in 2012 on their 4th quarter 2012 Form 941.
Employers could only use this procedure to the extent that they repaid or reimbursed their employees for the employee share of the social security and Medicare taxes prior to the filing of their fourth quarter Form 941. By taking advantage of this special procedure, employers avoided having to file Forms 941-X for the first three quarters of 2012.
Employers who did not take advantage of the special procedure must follow normal processes to correct their Form 941 for each period. If the excludible transit benefits were included on Forms W-2, the employers should prepare Forms W-2c to remove the excludible transit benefits from their employees’ income and wages and file Forms W-2c with the Social Security Administration and furnish them to its employees.
The same procedures are available to filers of other employment tax returns reporting social security and Medicare taxes (e.g., 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.
Employees whose employer provided transit benefits above $125 per month in 2012 and withheld income tax, social security, and Medicare taxes on the amount over $125 may be entitled to a refund of taxes withheld on the excess transit benefits (the portion over $125 and up to $240 per month).
Recovering Income Taxes
An employee will get credit on their Form 1040 for withheld federal income taxes reported on Form W-2. An employer may not repay or reimburse their employee or seek a refund from the IRS on the employee’s behalf for the income taxes withheld on the excess transit benefits in 2012.
If the excludible transit benefits were included on Form W-2, the employer should prepare a Form W-2c to remove the excess transit benefits from income and wages and furnish a copy to their employee. Employees who do not receive a Form W-2c from their employer should ask for one. If the employer does not provide one, the employee should follow the instructions in Tax Topic 154.
If an employee receives a Form W-2c and has already filed their income tax return, they will have to file a Form 1040X to reflect the decrease in taxable income due to the retroactive increase in excludible transit benefits. If an employee receives a Form W-2c and has not filed their income tax return before receiving the Form W-2c, they can simply file their Form 1040 using the Form W-2c.
Recovering Social Security and Medicare Taxes
Unlike the income tax, an employer can repay or reimburse an employee in a later year for the social security and Medicare taxes withheld as a result of the retroactive increase in excludible transit benefits.
Employees should seek refunds of social security and Medicare taxes from their employer first. An employer can repay or reimburse the employee or seek a refund from the IRS on behalf of an employee for social security and Medicare taxes on the excess transit benefits. If an employer files a claim for refund, without repaying or reimbursing the employee first, the IRS will refund the taxes to the employer, who will then give the employee their share.
If an employer does not repay or reimburse their employee, or agree to seek the refund of social security and Medicare taxes on their employee’s behalf, the employee may file a Form 843, Claim For Refund and Request for Abatement (PDF), to obtain a refund. An employee should not attach Form 843 to the employee’s income tax return. File Form 843 separately.
On Form 843, employees need to explain in detail their reasons for filing the claim and show the computation of the refund. In 2012, the employee tax rate for social security tax was 4.2% and the Medicare tax rate was 1.45%.
Employees must, if possible, attach a statement from their employer which includes the following:
- The amount, if any, their employer has repaid or reimbursed excess taxes withheld and the amount, if any, of credit or refund claimed by the employer or authorized by the employee to be claimed by the employer.
- The employer should include in the statement the fact that it is made in support the claim for refund of employee tax paid by the employer to the IRS.
If a statement cannot be obtained from the employer, the employee should attach a statement with the same information to the best of their knowledge and belief and include in the statement an explanation of why a statement could not be obtained from the employer.
An employee must also attach a copy of the employee’s Form W-2 or Form W-2c to prove the amount of social security and Medicare taxes withheld. Note that social security taxes are only refunded to the extent that the excess transit benefits, when added to other wages for the year, did not exceed the social security wage base for 2012 ($110,100).
Employees should write “Transit Benefits” in dark, bold letters across the top margin of Form 843.
Note: Employees may not seek a refund of the social security and Medicare taxes on excess transit benefits withheld by their employer on Form 1040. In addition, the procedures for seeking a refund of excess social security taxes due to having multiple employers do not apply. If an employee does have multiple employers and think they may have had excess social security taxes withheld they should consult Publication 17, Your Federal Income Tax, and the Instructions for Form 843.