Special Procedures to Handle Payroll Tax Issues on Transit Benefits Made Retroactively Nontaxable by Tax Increase Prevention Act of 2014 Issued

The IRS has issued procedures for employers who paid transit benefits during 2014 that were included in employee’s income, but which since qualified as excludable benefits due to the increase in the limits for such benefits from $130 to $250 per participating employee due to Section 103 of the Tax Increase Prevention Act of 2014.  The guidance is found in Notice 2015-2.

The exact procedures to be followed by an employer depend upon whether the employer has or has not already filed a Form 941 for the fourth quarter of 2014, as well as whether the employer has or has not provided employees with their copies of Form W-2 for 2014.

Normally an employer would apply for a refund of FICA and Medicare (other than Additional Medicare Tax) only after repaying the employee the overwithheld amounts.  The employer would do so by filing a Form 941-X for each taxable period involved.

If an employer has not yet filed a fourth quarter Form 941 may, in lieu of filing Forms 941-X for each affected quarter, reduce reported FICA wages (including, interestingly enough, any Additional Medicare taxable wages) on the fourth quarter 941.  In order to use this method, the employer must repay the overwithheld FICA, Medicare and Additional Medicare Tax to the affected employees before filing the fourth quarter Form 941.  As well, employers qualifying for and electing to use this procedure will not need a statement from each employee confirming that he/she has not made a claim and will not make a claim for the overcollected FICA tax for the year.

The employer using this method is to reduce the liability of the quarter starting with the last liability of the quarter.  That liability is to bear the entire balance of the adjustment if the liability is greater than the adjustment.  Otherwise the employer will continue reducing liabilities in reverse chronological order until the entire reduction is absorbed.  Negative numbers may not be reported either on Line 14 of Form 941 or Schedule B of Form 941.  The same rules will apply to all other employment tax returns reporting FICA (such as Spanish-language returns or those for U.S. possessions) and for taxes under the Railroad Retirement Act.

Employers who do not use this method will need to file Forms 941-X for each affected period and will not be allowed to refund the Additional Medicare Tax withheld.  Rather the employees will treat that as additional income tax withheld on their tax return for the year.

Employers that have not yet furnished Forms W-2 to their employees and who have repaid the taxes to employees will report the adjusted withholdings and wage amounts on the Forms W-2.  As was noted above, if the employer does not use the special procedures (that is, the employer uses the normal procedures) then the employer will not reduce the Additional Medicare Tax withheld since no repayment or reimbursement is generally allowed for such taxes (though employers using the special procedures are allowed and required to do so—and those employers will reduce that withholding).

In no case will the employer reduce or refund federal income tax withheld due to this change.  The employee will simply pick that up on their tax return.

If the employer reimbursed the employees for overcollected taxes after issuing Forms W-2 to the employees (but before filing the government copy of the forms), the employer must check the “void” box at the top of each incorrect Form W-2 (Copy A) and then prepare new Forms W-2 with the proper amounts and send the new Forms W-2 (Copy A) to the Social Security Administration.

The employer must write “CORRECTED” at the top of each of the affected employee’s new copies  (B, C and 2) of the Form W-2 and furnish those to the employees.

If the employer has already filed the Forms W-2 with Social Security, they must file Forms W-2c to correct the reporting.