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Commuter Tax Benefits

(Taken from "It Pays To Ride Transit", a publication of the Public Transit Association )

Employer-paid tax benefits

Tax savings are available if an employer pays for the cost of the transit commuter benefits. For example, an employer can buy transit passes from local transit agencies and distribute the passes without charge to employees who sign up for the program. Transit commuter benefits provide significant benefits for employers as well as employees. The employer’s cost of providing benefits can be deducted as a normal business expense. Even better, unlike ordinary wage payments, employers do not have to pay their share of federal payroll taxes on transit commuter benefits. This payroll tax savings alone is usually more than enough to cover any cost of administering the program.

Transit commuter benefits provide an attractive alternative to expensive parking benefits. While many companies have offered parking benefits for years, smart employers are beginning to recognize tax-free transit commuter benefits as an environmentally responsible way to help their employees while reducing congestion and cutting pollution in the community. As an added benefit, employees arrive relaxed because they’ve avoided congested rush-hour drives. It’s a terrific fringe that’s affordable.

Finally, because federal law exempts the first $110 per month in transit benefits from federal income and payroll taxes, and generally state and local taxes as well, the employer in this case effectively provides his or her employees with a tax-free transportation bonus.

Employers can also share the cost of commuting with their employees by paying for part of the transit commuter benefit and allowing employees to pay for the remainder using pre-tax dollars.

Employee-paid tax benefits

Employers can allow their employees to purchase transit commuter benefits - in effect pay for their own transit and vanpool commuting costs - with pre-tax dollars. This is done by deducting the cost of the transit commuter benefits received by an employee from the employee’s paycheck each period.

The first $110 per month of commuting costs paid by the employee in this way will be completely exempt from federal income and payroll taxes, and generally state and local taxes as well.

Such pre-tax deductions from an employee’s pay are comparable to those often used to pay for medical benefits under a cafeteria plan, or retirement benefits under a 401(k) plan.

The authority for employees to pay their own transit and qualified vanpool commuting costs with pre-tax dollars is a new element of existing law that was revised by the Transportation Equity Act for the 21st century, enacted into law in June 1998.