Employees save on federal income taxes.
Employers save on payroll related taxes.
Did you know you can pay for certain commute costs with pre-tax dollars and reap the benefits every day?
How Commuter Tax Benefits Work
The Federal tax code allows the use of tax-free dollars to pay for public transit, vanpool commuting and parking costs through employer-sponsored programs. Pre-tax commuter benefits are regulated by the Internal Revenue Code, Section 132(f)—Qualified Transportation Fringe.
As of February 2009, the commuter benefit allows employees to deduct up to $230 per month from their gross income to pay for their public transit and vanpool commutes. Employees whose monthly transit fees are less than the $230 cap are allowed to deduct the full amount from their paychecks. The measure helps employers save money by lowering their payroll taxes.
Additionally, employees are allowed to deduct up to $230 per month for eligible commuter parking expenses. Qualified parking is defined as parking at or near an employer's worksite, or at a facility from which employee commutes via transit, vanpool or carpool. Commuters can receive both the transit and parking benefits (up to $460 per month)
Companies can offer:
- a tax-free employer-paid subsidy
- a pre-tax employee-paid payroll deduction
- a combination of both of the above.
Employees who set aside income on a pre-tax basis for a qualified transportation fringe benefit do not pay federal income or payroll taxes on the income set aside. If you have a combined (local, state, federal) tax rate of 40 percent and spend $190 per month on public transit, you will save $76 each month or $912 a year. If you pay for monthly parking at $63 per month, you can save an additional $25 per month or $300 per year.
If an employer chooses instead to subsidize the benefit, it is actually more valuable than an equivalent raise because of the tax advantages (for example, if a subsidy of $190 is offered, this equals roughly $317 in taxable income).
Calculate your potential savings
Providing pre-tax commuter benefits to employees can save payroll taxes for employers. The value of the benefit paid to employees is considered a tax-free transportation fringe benefit and not wage or salary compensation, therefore, payroll taxes do not apply. Employers can save roughly 9 percent in payroll taxes (including FICA, SUI, and other taxes) on the amount employees set aside. If the employer chooses to offer the benefit in addition to salary, giving an employee $120 in transit benefits is thus less expensive for an employer than raising the employee’s salary by $120.
Calculate your company’s potential savings
How to Get Started
Commuter Benefit programs are easy for employers to implement. For information, call 1-800-FIND-RIDE. For Connecticut employers and commuters, please visit www.commutertaxbenefit.org