As discussed in a prior WorkCite article, the recently enacted Consolidated Appropriations Act, 2016 (the Act) permanently removed the disparity between the taxation of (i) commuter vehicle/transit benefits and (ii) qualified parking benefits under the Internal Revenue Code. These benefits are sometimes provided by employers at no out-of-pocket cost to employees, but more commonly employees purchase these benefits through payroll deductions.
The Act achieves “transit parity” by increasing the limit on commuter vehicle/transit benefits that can be excluded from gross income to the same limit that has applied to parking. Because the change is retroactive to the beginning of 2015, this week the Internal Revenue Service (IRS) issued Notice 2016-6 (the Notice), which provides payroll guidance as to how employers should deal with this retroactivity.
Background
Before the Act, a maximum of $130 of commuter vehicle and mass-transit benefits provided to an employee could be excluded from his or her 2015 gross income. As a result of the Act, this limit is retroactively increased to $250 for 2015, the same limit that applies to parking benefits in 2015. In this article, the difference between $250 and $130 is referred to as Excess Transit Benefits. Consequently, for 2015, employers must take steps to reduce the taxable wages of employees by the amount of any Excess Transit Benefits, as reported on IRS Forms 941 (Employer’s Quarterly Federal Tax Return) and W-2 (Wage and Tax Statement) or any other equivalent form.
Special Procedure for 2015 Adjustments on the Fourth-Quarter Form 941
To make corrections, employers who originally included Excess Transit Benefits in gross income and wages and withheld income and FICA taxes would generally be required to file IRS Forms 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim of Refund) for each quarter (the Normal Procedure). To reduce this administrative burden, the Notice provides a special administrative procedure (the Special Procedure) for employers who treated Excess Transit Benefits as taxable wages and have not yet filed their fourth-quarter Form 941 for 2015. By taking advantage of the Special Procedure, employers can avoid having to file IRS Forms 941-X and W-2c (Corrected Wage and Tax Statement).
To use the Special Procedure, an employer must first repay or reimburse its employees for the overcollected FICA taxes (including any additional Medicare tax) on the Excess Transit Benefits for every quarter of 2015 by the time the fourth-quarter IRS Form 941 is filed. Then, the employer may make corresponding reductions when reporting amounts on its fourth-quarter Form 941 by subtracting the Excess Transit Benefits from wages reported on the following lines:
- Line 2 (Wages, tips and compensation)
- Line 5a (Taxable social security wages)
- Line 5c (Taxable Medicare wages and tips)
- Line 5d (Taxable wages and tips subject to additional Medicare tax withholding)
To ensure that use of the Special Procedure does not result in a mismatch between (i) the total taxes reported on Form 941, Line 10 (total taxes after adjustments), and (ii) Line 14 (total liability for quarter) for monthly-schedule depositors, or Schedule B (Form 941) for semiweekly-schedule depositors, the employer should reduce the last liability of the quarter reported (Month 3 on Line 14 or the last liability entry on Schedule B, as applicable) by the amount of the tax reduction due to using the Special Procedure. If the amount reduced exceeds the last liability of the quarter, the employer should reduce its previous liabilities in reverse order until the amount of the tax reduction is completely used.
Normal Procedure Still Available to Employers Ineligible for Special Procedure
The Notice states that (i) employers who have already filed a Form 941 for the fourth quarter of 2015, and (ii) employers who have not repaid or reimbursed their employees who received Excess Transit Benefits in 2015 by the time the Form 941 for the fourth quarter is filed, must follow the Normal Procedure of filing Forms 941-X to make adjustments or claim refunds for any quarter in 2015 as to the overpayment of tax on any Excess Transit Benefits.
Employer Instructions for Form W-2
In addition to providing the Special Procedure, the Notice provides instructions for Forms W-2 (Wage and Tax Statement) in 2015 for employers who provided Excess Transit Benefits to employees in that year.
- Employers who have not yet furnished 2015 W-2s to employees, or filed such forms with the SSA, must take into account the increased exclusion in calculating the amount of wages reported in the following W-2 boxes: Box 1 (Wages, tips, other compensation) Box 3 (Social Security wages) Box 5 (Medicare wages and tips)
- Box 1 (Wages, tips, other compensation)
- Box 3 (Social Security wages)
- Box 5 (Medicare wages and tips)
- If such an employer has repaid or reimbursed its employees for the overcollected FICA taxes on Excess Transit Benefits (whether it utilized the Special Procedure or the Normal Procedure), it must 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. Under the Normal Procedure, however, the amount reported in Box 6, Medicare tax withheld, will not be reduced as to any additional Medicare tax withheld on the Excess Transit Benefits because no repayment or reimbursement of such amount is permitted after the end of 2015.
- In all cases, such employers must report in Box 2 (federal income tax withheld) the amount of tax actually withheld in 2015, which will be applied against the taxes shown on the employee’s federal income tax return.
- Employers who repaid or reimbursed their employees for the overcollected FICA taxes after furnishing 2015 W-2s and before filing such W-2s with the SSA must check the “Void” box at the top of each incorrect Form W-2 (Copy A) that is filed with the SSA. These employers must then prepare new W-2s with the correct information and file the new W-2s (Copy A) with the SSA. The employer must write “CORRECTED” on the employees’ new copies (B, C and 2) and furnish them to employees.
- Employers who have already furnished 2015 W-2s to employees who received Excess Transit Benefits and have filed those W-2s with the SSA must file Forms W-2c with the SSA to take into account the increased exclusion and to reflect any repayments or reimbursements of the withheld FICA tax. Copies also must be furnished to employees.
Observations
An employer may have provided 2015 W-2s to its workforce and then determined that corrected forms will have to be sent to some employees on account of the retroactive increase of nontaxable commuter vehicle/transit benefits under the Act. As it may take some time to complete and provide the corrected forms, the employer should consider notifying affected employees immediately that corrected forms will have to be issued, as some employees may have already started preparation of their 2015 individual income tax returns upon receiving their W-2s.
This marks the third time since 2013 that Congress has granted retroactive transit parity and therefore the third time that the IRS has had to issue payroll guidance as to the retroactivity. Because this time Congress has made parity permanent, after years of lobbying from mass-transit advocates, payroll managers will thankfully not have to deal with retroactivity issues in future years.
For further information, please contact either of the authors, Robert B. Wynne and Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.