Commuter Tax Benefits

Commuter Tax Benefits that Benefit both Employers & Employees

Good news for both employers and employees!  Employers wanting to promote ridesharing, in an effort to reduce drive alone employee commute trips, can now benefit financially by providing transit and ridesharing (vanpool of seven or more people and/or Worker/Driver bus) subsidies to their employees. According to the Taxpayer Relief Act of 1997, employers can now provide rideshare "qualified transportation fringe benefits" to their employees:

• In Addition to Compensation, or
• In Lieu of Compensation (IRC Section 9010, 26 USC 132(f)).

Benefits in Addition to Compensation – Employers may give their employees up to $110.00 per month in benefits to commute to work by transit or rideshare. The employer pays for the benefit and receives an equivalent deduction from business income taxes. Employees receive the benefit completely free of all payroll and income taxes, in addition to their current compensation.

Benefits in Lieu of Compensation – Employers may permit their employees to set aside some of their pre-tax gross income to pay for transit or rideshare expenses before taxes are computed. Employers do not pay for the benefit, but employees save on payroll and income taxes on the amount of the benefit they purchase, since that amount is no longer treated or reported as taxable salary. Employers’ payroll costs are reduced since payroll taxes do not apply to this set-aside amount because it is treated as a benefit.

Combination – Employers can give their employees part of the commuting expense (tax-free) in addition to their compensation and allow the employees to set aside part of their gross income (in lieu of compensation) to pay the remaining amount, up to the total monthly limit of $110.00. The employer receives an equivalent deduction from its business income taxes, while the employee saves on payroll and income taxes on the set aside amount, for the balance of the benefit. This is for those employers who may not be able to contribute the entire amount of the commuting expense.

Examples of Commuter Benefits

1. An employer may offer a tax-free transportation allowance to employees who commute by transit or rideshare vehicle. An employee chooses to set aside a portion of his/her gross salary to purchase a "Commuter Bonus" voucher each month. Up to $110.00 per month ($1320.00 per year) can be deducted from his/her salary for the vouchers, which are redeemable by transit operators and rideshare vehicle operators. The deducted amount is not subject to income taxes and is exempt from both the employee and employer portions of FICA and Medicare taxes.
   
2. An employer may offer a tax-free transportation benefit to employees who commute by transit, or rideshare vehicle. In this case, an employer may distribute up to $110.00 per month ($1320.00 per year) in "Commuter Bonus" vouchers to each employee who elects to commute by bus or rideshare vehicle. The $1320.00 annual benefit is considered non-taxable income to the employee and is also exempt from payroll taxes. The employer treats the payments as regular business expenses, similar to medical insurance premiums.
   
3. An employer may offer a matching allowance/benefit program to employees who commute by transit or rideshare vehicle. In this case, an employer may offer to provide an additional $30.00 "Commuter Bonus" voucher monthly to each employee who enrolls in a program that deducts up to $75.00 per month from his/her gross earnings. The matching program provides each employee the opportunity to realize the maximum $110.00 pre-tax monthly transportation benefit.

The transit commuter benefit is usually given in the form of a transit monthly pass or voucher that the employer purchases from a transit system and then provides free or at a discounted price to employees.

Who is Eligible – Private employers, non-profit organizations, public agencies (including the Federal Government), and military can provide the transit commuter benefits to their employees.  Employers are encouraged to take advantage of these exciting tax code changes. Providing transit benefits in lieu of salary will not increase costs to employers, but will actually reduce payroll costs since payroll taxes do not apply to these benefit amounts.

Updated: February 19, 2010 Phone: (360) 373-2877 or 1-800-501-RIDE

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