Wage Withholding Wisdom: Got a Ticket to Ride? It Might Be Subject to State Tax

While most states generally conform to the federal tax code, nearly all of the jurisdictions diverge from the Internal Revenue Code in some key areas.  Identifying these areas of nonconformity can slow down employers who must comply with state income tax withholding laws. The states’ varying approaches on several issues make this analysis a required part of the process.

For 2014 federal income tax withholding purposes, an employer may provide employees up to $130 per month on a tax-free basis for commuting on mass transit facilities. This maximum monthly transportation subsidy is adjusted annually to cover cost-of-living increases.

Along with benefits for mass transit, employers can provide parking on, or near, their business premises or at a location where the employee catches mass transit, a carpool or a vanpool to commute to work. For 2014, the parking exclusion under federal law is limited to a fair market value of $250 a month, or an equal amount of employer reimbursement of parking fees.

Minnesota is among the states that do not conform to the federal treatment of qualified transit and vanpool benefits. The state allows for parity with the $250 a month tax-free amount for employer-provided parking, according to recent legislative analysis by the Minnesota Department of Revenue.  However, for state tax withholding purposes, employers still are to follow federal treatment of qualified transit benefit amounts and withhold state tax on amounts to employees greater than $130 a month, a department official told Bloomberg BNA July 18.

A Minnesota employee who receives employer-provided transit benefits in 2014 will be able to subtract any portion exceeding $130 a month - up to $250 a month - when completing the 2014 Minnesota individual income tax return, the official said.

Qualified employer transportation benefits fall under I.R.C. § 132 , which also includes other fringe benefits such as qualified employee discounts, qualified moving expenses and de minimis fringe benefits. This section of the Code exempts such benefits from employment taxes and allows employees to exclude them from their gross income.

For example, Arkansas does not follow I.R.C. § 132, so employees in that state must always include employer-provided transportation benefits in their taxable income. Indiana and Wisconsin often differ from federal rules in the amounts they allow for qualified transportation benefits; however, for 2014, they conform to the federal treatment.

Qualified transportation options include transit passes, parking reimbursements and bicycle plans. A transit pass is any pass, token, fare card, voucher or similar item that entitles an employee to transportation on mass transit facilities or vanpools, according to the I.R.S.

Certain states conform to the federal treatment, but release their own exclusion amounts each year as well.  For example, effective Jan. 1, 2014, the Massachusetts exclusion amount for employer-provided parking is $250 a month, and the exclusion amount for the combined value of transit pass and commuter highway vehicle transportation benefits is $130 a month. These amounts conform to the federal exclusion amounts.

By Allison M. Gatrone