Retroactive Increase in Excludible Transit Benefits for 2014
Section 103 of the Tax Increase Prevention Act of 2014 (TIPA) retroactively increased the monthly transit benefit exclusion from $130 to $250 per participating employee for the period of January 1, 2014, through December 31, 2014. This increase in the monthly transit benefit exclusion does not extend past December 31, 2014. For 2015, the monthly exclusion is $130.
Within this article,
- “Transit benefits” refers to any combination of transit passes and transportation in a commuter highway vehicle that meets the requirements of Internal Revenue Code Section 132 and the applicable regulations. For more information, see “Transportation (Commuting) Benefits” in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
- “Excess transit benefits” refers to transit benefits provided during 2014 by an employer to an employee in excess of $130 per month and up to $250 per month. These excess transit benefits are now excluded from the employee’s gross income and wages.
Employers that provided excess transit benefits during 2014 and treated those benefits as taxable wages must reduce the taxable wages of affected employees, as reported on Forms 941 and W-2 and any equivalent forms. 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 2015-02 to provide guidance to employers on how to account for the retroactive change when filing Forms 941 and W-2.
Employers must reduce the taxable wages of affected employees, as reported on Forms 941 and W-2 and any equivalent forms, by the amount of any excess transit benefits. For example, if an employer gave its employees monthly transit passes worth $200 per month and included $70 in wages, it must now remove that $70 from wages. Or, if the employer ran a salary reduction plan and allowed the employees to allocate more than $130 (up to $250) to transit benefits, it must now remove the amount above $130 from wages. For example, if the employee purchased a $200 transit pass by way of a pre-tax deduction of $130 and a post-tax deduction of $70, the $70 post-tax deduction must now be treated as a pre-tax deduction.
Under normal rules, employers who originally treated these excess transit benefits as includible in gross income and wages and withheld income taxes and FICA taxes would be required to file Form 941-X for each quarter to make corrections.
Notice 2015-2 provides a special administrative procedure for employers that have not yet filed their fourth quarter Form 941 for 2014 and that meet the other requirements below. Under this special administrative procedure, employers may account for the excess transit benefits they provided in 2014 by reducing the wages reported on their 4th quarter 2014 Form 941 by the excess transit benefits for all four quarters of 2014. By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X and Forms W-2c.
In order to use this special administrative procedure,
- Employers must repay or reimburse their employees for the overcollected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2014 on or before filing the fourth quarter Form 941.
- Employers 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 .
- Employers may correct the employer share of FICA tax only if the corresponding employees’ share of FICA tax has been repaid or reimbursed to the employees.
- Employers, in reporting amounts on its fourth quarter Form 941, will reduce the fourth quarter Wages, tips and compensation reported on line 2, Taxable social security wages reported on line 5a, Taxable Medicare wages and tips reported on line 5c, and Taxable wages & tips subject to Additional Medicare Tax withholding reported on line 5d by the excess transit benefits for all four quarters of 2014.
- To ensure that the Form 941 line 10 (Total taxes after adjustment) matches Form 941 line 14, employers must reduce the last liability of the quarter reported (that is, Month 3 on line 14 of Form 941 or the last liability entry on Schedule B) by the amount of the tax reduction due to use of the special administrative procedure. If the amount of the tax reduction exceeds the last liability of the quarter reported on line 14 or Schedule B, the employer should apply the amount of the tax reduction to reduce previous liabilities in reverse order until the amount of the tax reduction is completely used. Note that negative numbers must not be entered on Line 14 or Schedule B.
Employers who do not take advantage of the special procedure must follow normal processes to correct their Form 941 for each period, including repaying or reimbursing employees for overcollected social security and Medicare taxes (but not Additional Medicare Tax), obtaining written employee statements, and filing Form 941-X for each affected 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 $130 per month in 2014 and withheld income tax, social security, and Medicare taxes on the amount over $130 may be entitled to a refund of taxes withheld on the excess transit benefits (the portion over $130 and up to $250 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 2014.
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, Medicare Taxes, and Additional Medicare Taxes
Unlike the income tax, an employer must repay or reimburse an employee in a later year for the social security and Medicare taxes withheld on the excess transit benefits in 2014.
In addition, employers using the special administrative procedure described above must repay or reimburse an employee for the Additional Medicare Tax withheld on the excess transit benefits in 2014. Employees of employers that do not use the special administrative procedure will account for any overwithheld Additional Medicare Tax when they prepare Form 8959, Additional Medicare Tax, and attach it to their individual income tax return.
Employees should seek refunds of social security and Medicare taxes from their employer first. An employer using the special administrative procedure described above must repay or reimburse the employee for the overcollected FICA tax (including any Additional Medicare Tax) before filing the fourth quarter Form 941. An employer not using the special administrative procedure must 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 not using the special administrative procedure 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 2014, the employee tax rate for social security tax was 6.2% 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, of excess tax withheld that the employer has repaid or reimbursed 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 fact that the statement is made in support of 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 2014 ($117,100).
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.