Transit Tax Benefits
Commuter benefits offer a number of ways to save money and increase worker productivity. According to Internal Revenue Code Section 132(f), qualified transportation fringe benefits are excludable from income for purposes of taxation.
Qualified transportation fringe benefits include:
Transit Passes: Transit passes include any vouchers, passes, farecards, tokens, or related items that employees can use to pay for transportation on mass transit.
Transportation in a Commuter Highway Vehicle: A vanpool is a "commuter highway vehicle" with a seating capacity of at least six adults, not including the driver.
Offering qualified transportation benefits can yield significant tax savings. Currently, the Federal Tax Code allows employers to offer their employees up to $130 per month for transit and vanpool passes. Alternatively, employees can set aside up to $130 per month (pre-tax) for transit or vanpool expenses. Neither the employer nor the employee pay payroll or income taxes on the benefit amount.
Employers have three options:
- The employer covers the full cost of the benefit. With this option, the employer pays significantly less for an employee's transportation tax-free up to the monthly limit. Because of the savings in payroll and income taxes, the employer pays significantly less than if it had given the employee a comparable increase in salary, and the employer is thus able to offer the employee a no-cost commute.
- The employee pays for transportation with pre-tax salary. An employee can elect to purchase transit or vanpool passes up to the monthly limit, with money taken out of his or her pre-tax salary. Because of the savings in payroll and income taxes, the employee pays at least one-third less than if the passes were purchased with taxable income. The employer incurs no direct cost and saves taxes that it would otherwise have paid on that portion of the employee's salary.
- The employer and the employee share the cost of the benefit. With this option, the employer pays for at least half the monthly limit for the employee's transportation tax-free. If the employee's commute expenses exceed the amount offered by the employer, he or she can pay for the difference with pre-tax income. This program incurs a low cost to the company and saves money in taxes for both the employer and the employee.
Other Cost Savings
- Reduced employee recruiting and retention costs. Helping employees save money can raise their opinion of the employer, which reduces turnover and increases productivity. Employers then spend less time and money recruiting and training new employees.
- Reduced parking expenses. Carpool, vanpool, and transit users require less parking space, saving the company money on rent, construction, and maintenance.
For more detailed information about the tax treatment of employer-provided commuting benefits, review the Federal Tax Benefit Brief.