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Does your business offer transportation fringe benefits? If not, you may be missing out on important tax savings.
Under what is known as a “Commuter Choice” program in the federal tax code, you may get tax breaks for subsidizing transit and vanpooling for your employees. In addition, your employees may benefit when they set aside pre-tax dollars for certain commuting expenses.
There are four ways an employer can choose to participate:
- Tax Breaks When You Subsidize Vanpools/Transit
You may provide up to $115 per month to employees who commute to work by transit or vanpools. As the employer, you pay for the benefit and receive the equivalent deduction from business income taxes. Employees receive the benefit completely free of all payroll and income taxes in addition to their current salary. You may pay directly for vanpool expenses or purchase transit passes for employees.
- Employees May Set Aside Pre-Tax Dollars, and Employers Save on Payroll Costs
You may permit employees to set aside up to $115 per month of their pretax income to pay for transit or vanpools. Employees save on payroll and income taxes since that amount is no longer reported as taxable salary. Since the amount set aside is treated as a benefit, you’ll be able to reduce payroll costs.
- A Flexible Plan for Employers Who Partially Subsidize Costs
You may subsidize a portion of vanpool and transit costs in addition to salary and allow your employees to set aside part of their pre-tax income to pay the remaining amount. You can subsidize any amount or allow the employee to set aside any amount, but only $115 per month is tax deductible.
- Parking Cash-Out
You may offer employees the option of cashing out the dollar value of parking you provide. Employees forego the parking and either receive a taxable cash value of the parking space or a tax-free transit or vanpool benefit of up to $200 per month.
Commuter Choice Benefits to Employers:
- Enhance your benefits package at little or no cost
- Minimal paperwork required
- Reduces payroll and business income taxes
Commuter Choice Benefits to Employees:
- Allows flexibility for occasional users of transit and vanpools
- Reduces personal income taxes
Additional Information:
- Benefits in addition to salary are treated as a regular business expense similar to medical insurance premiums.
- Transportation benefits are excluded from cafeteria plans. IRS Section 125 covers cafeteria plans and flexible spending accounts. Section 132(f) covers transportation benefits.
- Section 132(f) benefits are exempt from antidiscriminatory requirements. The employer decides who receives the benefits.
- There is no “use it or lose it” rule. Any amount not used by the employee at the end of the year is returned to the employee the following year as taxable income.
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