Commuter Tax Benefits
What are commuter tax benefits?
Commuter tax benefits are federally-approved, employer provided, tax-free incentives for employees to reduce their monthly commuting costs. According to the Internal Revenue Code Section 132(f) on Qualified Transportation Fringe Benefits, commuter expenses for transit, vanpool, parking, and biking are excludable from taxable income.
How do they work?
There are three ways for employers to take advantage of these benefits: tax-free employer-paid subsidy, employee-paid pre-tax benefit, or a combination of both. Under the employer-paid subsidy, an employer can pay for (subsidize) their employees’ commuting costs for transit, vanpool, parking and biking. Under the employee-paid pre-tax deduction, with employer approval, an employee may set aside their pre-tax income to pay for their commute costs for transit, vanpool, and parking. Employers and employees can also share the cost, with the employer providing a pre-determined subsidy each month and the employee selecting a pre-tax deduction to supplement the subsidy. While each employer must consider many variables when deciding how to offer commuter tax benefits, keep in mind that according to a study done by the Transit Cooperative Research Program, employer-subsidized transit benefit programs are more likely to increase employee use of alternative transportation than employee-paid pre-tax benefit programs.
Section 132(f) allows employers to provide employees up to $255 per month for transit expenses, $255 per month for vanpool expenses, up to $255 per month for qualified parking expenses, and reimbursement for $20 per month of qualified bicycling expenses. Transit and vanpool benefits may be combined for a benefit cap of $510 per month. Employees may also elect to set aside pre-tax income to pay for their qualified commuting expenses, up to the specified limit. Bicycling expenses, however, cannot be used with the employee-paid pre-tax deduction.