The American Taxpayer Relief Act (“ATRA”) of 2013 increased the monthly transit benefit exclusion from $125 to $240 per employee, retroactive to Jan. 1, 2012. If an employee’s transit benefit was greater than $125 in 2012, the employer has already withheld income tax, Medicare and Social Security tax on the excess transit benefit, i.e. the dollar amount of the benefit above $125 and up to $240 per month. The IRS, in Notice 2013-8, has established a simplified method for receiving a refund of the Social Security and Medicare tax, but to take advantage of the simplified refund an employer must file IRS Form 941 by Jan. 31, 2013.
Individual employees can recover associated excess income tax withholding through their 2012 income tax return. An affected employee’s W-2 must also be amended to recharacterize as non-taxable any transit benefits in excess of $125 but not greater than $240, which amount would have been reported as taxable wages for 2012, but may now be properly characterized as a non-taxable benefit due to the retroactive effect of the legislation.
With regard to transit benefits in 2012 in excess of $125, employers have already withheld income taxes and Medicare taxes. In addition, for employees whose wages were below the Social Security wage base ($110,100 in 2012), the employer would have already withheld Social Security taxes on transit amounts in excess of $125 per month. Now that Congress has retroactively increased the $125 exclusion to $240 for 2012, what must an employer do to correct the additional wages that it previously imputed to employees as excess transit benefit wages in 2012? Recently issued IRS Notice 2013-8 provides some guidance on this issue.
Refund Excess FICA
Prior to the employer filing IRS Form 941 for 2012 (due Jan. 31), the employer should reimburse the employee for the excess Social Security and Medicare tax that it withheld from the employee’s wages. After doing so, the employer may reduce the fourth quarter amounts to be reported on IRS Form 941 in the following manner:
- Excess wages, tips and compensation, line 2, are reduced for all excess transit benefits in all four quarters of 2012;
- Taxable Social Security wages, line 5a, are reduced for all excess transit benefits in all four quarters (assuming that the employee’s compensation was below the $110,100 Social Security wage base) of 2012; and
- Medicare wages and taxes, line 5c, are reduced for all excess transit benefits in all four quarters of 2012.
If an employer fails to take this action by Jan. 31, the employer should file IRS Form 941-X for each calendar quarter of 2012. In doing so, the employer must refund the Social Security and Medicare overpayments to the employee, and it must also secure the employee’s written statement that the employee has not, and will not, file a claim for a refund. Thus, by dealing with the issue when filing Form 941 by Jan. 1, 2013, the employer avoids the need to obtain employee statements and also avoids the need to file a separate refund for each of the four quarters of 2012.
If the employer has not yet distributed W-2s to employees (deadline Jan. 31) the employer should reduce the amount of wages reported as excess transit benefits. This will require a reduction in the wages reported in the following boxes:
- Box 1 – Wages, tips and other compensation;
- Box 3 – Social Security wages (on wages below the $110,100 wage base); and
- Box 5 – Medicare wages and tips.
If the employer has already reimbursed the employee for the excess Social Security and Medicare taxes that have been withheld, the employer must also reduce the amounts reported in Box 4, Social Security tax withheld, and Box 6, Medicare tax withheld, by the dollar amount of such reimbursements.
If the employer has already distributed W-2s to employees, but has not yet filed them with the Social Security Administration, the employer should check “Void” on the copy of the W-2 that is to be sent to the Social Security Administration. The employer then should issue new W-2s and write “Corrected” on Copies B and C that are to be distributed to employees. Copy A (without the “Corrected” notation) should be sent to the Social Security Administration.
If the W-2s have already been distributed and filed, the employer must file Form W-2C, Corrected Wage and Tax Statement, to correct the excess transit benefits previously reported. With regard to the excess income tax withheld, that amount will be accounted for, and any refund provided, in connection with the employee’s own income tax return.