Global Tax Insights
Tax Free Commuter Benefits – Savings for Employees and EmployersJune 20, 2016
As part of your benefits package, you might consider offering tax-free commuter benefits—these could potentially save your employees hundreds of dollars each year.
In general, commuting expenses are considered personal expenses and are not deductible. See our blog (Commuting Expenses- Deductible or Not?) for a few exceptions. The IRS does however, allow employers to offer tax free benefits to their employees to help defray some of the costs of commuting. Let’s explore these plans and their benefits to both employees and employers.
Tax free commuter benefits, also known as qualified transportation fringes, are a part of benefit packages offered by employers. This plan allows employees to exclude the amount of qualified monthly commuting expenses (subject to limitations) from their gross income. Unfortunately, not all commuting costs are included. The exclusion applies only to the following costs:
- Employer provided transportation using a vehicle that seats 6+ adults, is used 80% for commuting, and is 50% full with passengers.
- For public transportation including train, bus, taxi, etc.
- Parking on or near the employer’s business premises.
Qualified bicycle commuting reimbursement:
- $20/month for an employee who regularly uses a bicycle for travel between home and work and does not receive any other commuter benefits.
The IRS limits the monthly amount that may be excluded from an employee’s income for commuting costs. For 2016, the monthly maximums are $255/month for qualified parking and $130/month for transit/vanpool.
In many cases the plan works similar to a health flex spending account (FSA). At the beginning of the plan year, each employee has the option to elect into the program and indicate the amount they want withheld from each paycheck for commuting costs. Participants use a plan provided debit card or submit for reimbursement as costs are incurred. Unlike an FSA, there is no mandated “use-it-or-lose-it” provision. Unused funds are allowed to carryforward into the next year. Be sure to review plan documentation before enrolling to ensure there are no employer specific provisions that could affect you.
The amount set aside each month for a commuter benefit plan is not subject to federal income nor payroll taxes. For an employee who maxes out the parking benefit and is in the highest tax bracket of 39.6%, the savings could be as much as $1,200 per year. Not bad, considering parking is something the employee is likely already paying for with no benefit.
A commuter benefit plan is also a great way for employers to save on payroll taxes. The amount the employee elects to put aside is also not subject to the mandatory employer side of Medicare and FICA withholdings (currently 7.65%). So for the same employee that maxes out the parking benefit, it saves the employer $230.
The plan is also a great way for employers to help attract, retain, and reward employees.
To learn more about these savings, please contact our Private Client Services Group.