Employers offering mass transit benefits should make note of recent changes to the allotted amount employees can take out pre-tax, a provision included in the Tax Increase Prevention Act of 2014 which was signed by President Barack Obama on Dec. 19.
The rule puts in place a transit parity provision, which would provide additional tax relief for employees who take advantage of transit fringe benefits a type of tax-free income offered to employees in an effort to reduce commuting costs.
The bill will retroactively extend various tax relief provisions from 2013 into the end of 2014, including commuter benefits both mass transit and parking fringe benefits. The mass transit monthly benefit will increase from $130 to $250, matching current parking benefits. And although the IRS hasnt yet released guidance, transit commuters who run all their commuting costs through their employers transit plan should get a retroactive true-up a potential $576 extra tax savings for 2014, according to tax services firm Ryan.
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There are two routes employers can take, says Michael Mojabi, a principal at Ryan. In essence, an employer can choose to do nothing and just have the employee deal with getting back any excess taxes on his/her personal income tax return or, they can choose to refund the taxes to the employees, he says, adding if employers do choose to refund employees, there are a number of steps that will need to be followed.
For example, he says, if employees have been taxed on benefits in excess of $130 per month during 2014 for social security, Medicare and federal income tax withholding purposes, an employer may provide a refund to the employee for the excess Social Security and Medicare taxes up to the $250 limit, he says. Mojabi also notes that the maximum amount of social security and Medicare taxes an employee may be reimbursed for would be $120 (the difference between the $130 previous limit and $250 retroactive applied limit).
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Mojabi reminds employers to make sure they make the necessary changes to Boxes 1, 3, 4, 5 and 6 of impacted employees Form W-2 to reflect the refunds provided to the employee.
He adds that the employers may not refund the excess federal income tax withholding nor make adjustments for the excess amount on the employees form W-2 (box 2) or on the employer forms 941.
The assumption is that the employee would receive a refund of any excess income tax withholding when he/she files a personal income tax return, he says. The logic is that the employer is going to reduce the total wages (including the excess commuter benefits the employee was previously taxed on) on box 1 of the Form W-2 but will not reduce the actual income taxes thereby the employee technically had more tax withholding than wages.
