The IRS issued a special administrative procedure Jan. 12 allowing employers to implement a retroactive increase in excludable qualified transit benefits on their Form 941 for the fourth quarter of 2015. The increase resulted from recent tax legislation.
Under Notice 2016-6
, employers that provided transit benefits in excess of $130 per month may adjust the fourth-quarter Form 941 (if it has not yet been filed) to reduce the wages subject to withholding for all four quarters of 2015. Under normal refund and adjustment procedures, employers would be required to file a Form 941-X for each quarter of 2015 to receive a refund of payroll taxes.
This Tax Flash describes procedures for employers who have and have not filed Form 941 for the fourth quarter of 2015, which is generally due Feb. 1, 2016.
Lawmakers enacted the Protecting Americans from Tax Hikes Act of 2015 in late December, and it retroactively extended and made permanent many expired provisions, including the increased monthly transit benefit exclusion under Section 132(f)(2)(A). As a result, the monthly qualified transit benefit per employee is increased retroactively for the 2015 calendar year from $130 to $250. The limit increases to $255 per employee for the 2016 calendar year and will continue to be indexed for inflation in future years.
Section 132(a)(5) excludes any qualified transportation fringe benefit from an employee’s income, reducing the employee and employer share of payroll taxes and the employee’s taxable income. A qualified transportation fringe includes (i) transportation in a commuter highway vehicle between home and work, and (ii) transit passes (transit benefits). Neither the act nor Notice 2016-6 allows employees to retroactively increase their compensation reduction for 2015 to take advantage of the increase in excludable transit benefits.
A qualified transportation fringe for purposes of Section 132(a)(5) also includes qualified parking. The extenders legislation did not change the amount excludable from income for qualified parking during 2015, which is $250 per month, or during 2016, which is $255 per month.
In response to the extenders legislation, the IRS issued Notice 2016-6, which includes a special administrative procedure that applies to any employer that provided transit benefits in excess of $130 per month during 2015 using either its own funds or an arrangement to reduce compensation. The amounts in excess of $130 a month and less than $250 a month are referred to as “excess transit benefits.”
Special administrative procedure
As described previously, the special administrative procedure allows employers that have not yet filed their 2015 fourth- quarter Form 941 to make an adjustment on that form to reduce the wages subject to withholding for all four quarters of 2015.
On or before filing the 2015 fourth-quarter Form 941, the employer must repay or reimburse the employee for the over-collected Federal Insurance Contributions Act (FICA) taxes (including the additional 0.9% Medicare tax on wages in excess of $200,000) on the excess transit benefits for all four quarters of 2015. The employer then reduces the amount of wages reported on the fourth-quarter Form 941 in lines 2, 5a, 5c and 5d by the excess transit benefit for all four quarters of 2015. Employers may correct the employer share of FICA tax only if the employee’s share of FICA tax has been repaid or reimbursed to the employee. Also, the repayment and reimbursement of over-withheld Social Security tax must take into account that the refund is limited to the amount paid on excess transit benefits that, when added to other wages for the year, did not exceed the Social Security wage base for 2015 ($118,500).
Under normal refund procedures, an employer must obtain an employee’s written consent to request the refund and must obtain a written statement from each employee confirming that the employee did not and will not make a claim for refund of the over-collected FICA tax. The special administrative procedure allows employers that have not yet filed Form 941 for the fourth quarter of 2015 to make the adjustment without obtaining the written statements from the employees.
Employers that filed the fourth-quarter Form 941
Employers that have already filed the fourth-quarter Form 941 must use Form 941-X and normal procedures to make adjustments or claim refunds for any quarter in 2015. This means employers must file a Form 941-X for each quarter in 2015 in which amounts were withheld on excess transit benefits, and must secure written consents and the appropriate written statements from employees. Furthermore, the employer may not repay or seek a refund of the additional 0.9% Medicare tax or income tax deducted or withheld from the employee in 2015.
2015 Form W-2
Employers that paid excess transit benefits and have not yet issued the 2015 Form W-2 must reduce the amounts reported in boxes 1, 3 and 5 by the amount of the excess transit benefits. Any adjustment to box 3 of Form W-2 for wages subject to Social Security tax must take into account that the reduction is limited to the amount paid on excess transit benefits that, when added to other wages for the year, did not exceed the Social Security wage base for 2015 ($118,500).
Those employers that repaid the over-collected FICA tax prior to finishing Form W-2 must reduce the amounts of withheld tax reported in boxes 4 and 6 by the amounts of the repayments. In all cases, employers must report in box 2 of Form W-2 the amount of income tax withheld during 2015.
Employers that have already filed the 2015 Forms W-2 must file Forms W-2c to take into account the increased exclusion for transit benefits and to reflect any repayment of the withheld FICA taxes.
For more information, please contact Eddie Adkins or Jeffrey Martin.
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