Tax Benefits

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Commuter Tax Benefits

Tax-Free and Pre-Tax Benefits for Commuters & Employers

Introduction

The Federal Government has enacted tax laws that benefit commuters who travel to work on public transit or vanpool to the workplace. Employees are eligible for employer subsidies or they may set aside up to $100 a month of their pre-tax income towards commuting costs. Employers who subsidize their employees’ commute may receive equivalent deductions free of additional payroll and federal income taxes.

The Transportation Equity Act for the 21st Century (TEA-21) amended the federal tax code, Internal Revenue Code Section 132 (f), and now allows federal tax advantages for employer sponsored commute incentive programs. Employers can receive tax benefits for providing certain types of employee transportation benefits called "Qualified Transportation Fringes." This section briefly describes general information and descriptions of the tax incentives. However, you should consult with your company’s accountant or tax attorney to ensure compliance.

Description of Transportation Benefits

Transit/Vanpool Tax-free Benefit Employers can give employees up to $100 per month in benefits to commute by transit or vanpools. The employer pays for the benefit and receives an equivalent deduction from business income taxes. Employees receive the benefit free of all payroll and income taxes.
Transit/Vanpool Pre-tax Benefit Employers can have employees set aside some of their pre-tax income to pay for transit or vanpools. Up to $100 per month is considered a pre-tax benefit. Therefore, employees save on payroll and income taxes and employers save on payroll costs as well.
Combination Benefit Employers can share the cost of commuting by giving the employee part of the commuting expense tax-free and allowing employees to set aside the remaining amount (pre-tax) up to the total limit of $100 per month.
Parking Cash Out This option is meant to provide an additional financial incentive for employees to use alternate mode options. An employer may offer to give employees cash for their parking space and the option to take payment as:
- taxable cash, or
- a tax-free fringe or pre-tax benefit for transit or vanpools, or
- a combination of cash and a fringe.

Questions & Answers

What types of transit service qualify for the Transportation Commute Benefit?

Any public or privately-owned or operated bus, rail, subway, shuttle bus service or vanpool that provides regular commute operations.

Can the employer provide both the parking benefit and the transit/vanpool benefit to employees who travel in vanpools and use commercial parking?

The driver of the vanpool who uses the commercial parking is eligible for the parking benefit (up to $175/month), as well as the transit/vanpool benefit (up to $100/month). All other employees in the vanpool are only eligible for the vanpool benefit because only one person can receive the parking benefit.

Are walkers, bicyclers, or carpools covered under the Transportation Commute Benefit?

No. However, employers can offer incentive programs, such as taxable subsidies, for those who walk, bike, or ride in a carpool.

What kind of record keeping is required?

With cash reimbursements, a written agreement/policy is suitable. For transit and vanpools, it is important to keep records proving expenditures such as transit pass invoices from the local provider.

Can transit passes be provided by the employer in lieu of compensation?

Yes. Employees can set aside some pre-tax income to pay for transit or eligible vanpools. Therefore, employees save on payroll and income taxes and employers reduce payroll costs.

Tax Benefits

"Commute Benefits" are like money in the bank. Employers save on payroll related taxes. Employees save on federal income taxes.

Alternative Mode of Transportation	Transit	Vanpool	Qualified Parking
Incentive	Up to $100/month, $1200/year for transit expenses	Up to $100/month, $1200/year for vanpool expenses	Up to $175/month, $2,100/year, for parking at or near an employer’s worksite, or at a facility from which employee commutes via transit, vanpool, or carpool
Employer Tax Benefit	Employers give their employees up to $100/month to commute via transit; gets a tax deduction and saves over providing same value in gross income or Employers allow employees to use pre-tax income to pay for transit and employers save on payroll tax (at least 7.65% savings) or A combination of both up to statutory limits	Employers give their employees up to $100/month to commute via vanpool; gets a tax deduction and saves over providing same value in gross income or Employers allow employees to use pre-tax income to pay for vanpooling and employers save on payroll tax (at least 7.65% savings) or A combination of both up to statutory limits	Employers give their employees up to $175/month for qualified parking; gets a tax deduction and saves over providing same value in gross income or Employers allow employees to use pre-tax income to pay for qualified parking and employers save on payroll tax (at least 7.65% savings) or A combination of both up to statutory limits
Employee Tax Benefit	Employee receives up to $100/month tax free (not on their W-2 form) or Employee pays for commute benefit with the pre-tax income and saves on income tax or A combination of both	Employee receives up to $100/month tax free (not on their W-2 form) or Employee pays for commute benefit with the pre-tax income and saves on income tax or A combination of both	Employee receives up to $175/month tax free (not on their W-2 form) for qualified parking or Employee pays for commute benefit with the pre-tax income and saves on income tax or A combination of both