April 11, 2018
As we mentioned previously, the 2017 tax reform (sometimes called the Tax Cuts and Jobs Act) revised the tax code to say that an employer could not deduct qualified transportation fringe benefits like qualified parking, transit passes, and vanpooling. The IRS has now clarified that an employer cannot deduct qualified transportation fringe benefit amounts, even if the benefit is withheld from an employee’s paycheck. The withholding would still be pre-tax for the employee.
This conclusion comes from page 21 of the recently released IRS Publication 15-B on Fringe Benefits. It says, “[N]o deduction is allowed for qualified transportation benefits (whether provided directly by [the employer], through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after December 31, 2017.” (emphasis supplied)
FICA and FUTA Exclusions May Still Apply
The good news is that it appears these benefits are still excluded from FICA and FUTA (which are other payroll taxes that an employer withholds and/or pays). The tax code says FICA and FUTA do not apply to qualified transportation fringe benefit amounts if the employer reasonably believes they can be excluded from the employee’s income. This exclusion appears to apply whether the employer pays for the transportation benefit directly or the employee reduces his/her salary to pay for it.
Even though the tax reform bill changed the tax deduction for employers, employees can still exclude these benefits from their income tax. Therefore, it appears employers should not have to withhold or pay, as applicable, FICA and FUTA on qualified transportation fringe benefit amounts. However, additional confirmation from the IRS on this point would be welcome.
Keep an Eye on Local Law
Given this complexity, some employers might consider moving to an after-tax transit benefit program. However, if our understanding of FICA and FUTA is correct, they would lose out on some potential tax savings by doing so.
More importantly, however, some cities, like New York, San Francisco, and Washington, D.C., require employers to offer commuting benefits to employees in those cities. In some cases, those ordinances require that the benefit be provided pre-tax. Therefore, employers in cities with these types of ordinances should make sure to consult local law before changing their commuter benefits strategy.
While the lost tax deduction is the result HUB expected, it still creates some tax complexity for employers. Employers need to consult with their payroll vendors and check their payroll systems. They should ensure that qualified transportation fringe benefit amounts are properly coded and that payroll accurately reflects the tax treatment of these deductions.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.