Commuter Tax Incentives
- How it Works
- Bottom Line
- Environmental Benefits
- IRC 132(f)
How the Commuter Benefit Works
The Federal tax code allows the use of tax-free dollars to pay for transit commuting and parking costs through employer-sponsored programs. Commuter tax benefits are regulated by the Internal Revenue Code, Section 132(f)—Qualified Transportation Fringe. For the 2016 taxable year, the tax code allows tax-free transportation fringe benefits of up to $255 per month per employee for transit expenses and up to $255 per month for qualified parking. 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.
Companies can offer:
- A tax-free employer-paid subsidy
- A pre-tax employee-paid payroll deduction
- A combination of both of the above.
Note: please contact your employer to see what options are available.
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 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).
Providing pre-tax commuter tax 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 7.5% in payroll taxes (including FICA, SUI, SDI and city taxes) on the amount employees set aside. If the employer chooses to offer the benefit in addition to the employee’s monthly salary, giving an employee $255 in transit benefits is less expensive for an employer than increasing the employee’s salary by $255.
The program is easy to set up and use and must be implemented by employers before employees can use it. The NNTMA is here to assist you in getting your company's Commuter Tax Benefit program up and running!
The Bicycle Commuter Act
You can now be reimbursed for riding your bicycle to work. As of January 1, 2009, employers can offer up to $20 per month to employees who regularly commute to work by bicycle (and who do not receive any transit or parking benefits) to offset:
- the cost of buying,
- improving, and/or
- storing their bicycles.
Depending on what employers want to do and how they are set up, bicyclists can receive the $20 reimbursement (receipts may be requested by the employer) as:
- cash reimbursements,
- vouchers redeemable at bicycle shops or parking locations, or
- as a pre-tax deduction (neither the employee nor the employer pays payroll taxes on the value of the benefit and this is "cheaper" than providing an equivalent salary increase). *
Employees and employers both save:
- Up to $20 per month ($240 per year) can be provided tax-free for bike commuting for the employee.
- Employers and employees can save on federal, and possibly state income taxes depending on the option selected.
- For employers this is an effective way to address their concerns for the environment and support their employees.
- Employers that provide "Qualified Tax Fringe Benefits" have noted reduced stress from not driving, increased job satisfaction, improved on time arrival and enhanced productivity.
*If an employer wants to report a pre-tax deduction on W-2s, box 14 can be used. No special IRS reporting, such as W-2 or 1099 statements are required.
Have questions about the Bicycle Commuter Act, then visit:
- Bicycle Commuter Tax Provision: Frequently Asked Questions, sponsored by the League of American Bicyclists (http://www.bikeleague.org/news/100708faq.php)
Qualified Transit/Vanpool Tax Benefit
Thanks to the American Recovery and Reinvestment Act, Americans who commute by transit, which also includes vanpools can save up to $1,000 or more a year in tax savings.
This 2009 law raises the amount of pre-tax income that workers enrolled in employer-sponsored commuter benefits programs can use to pay for transit to $230 per month (from $120 per month).
How Will this Affect My Bottom Line?
This increase will boost savings for both employees and employers. While employees can save up to $1,000 per year, organizations that offer the benefit can save up to an additional $100 per employee per year in payroll taxes.
This will be particularly helpful to commuters looking to offset rising fares and may in some cases keep the cost of a monthly commuter pass below what commuters are currently paying. This incentive will not only benefit commuters economically but will allow folks to choose an option that is better for the environment than driving alone.
Additionally, strong commuter benefits can help employers attract and retain qualified employees as well as improve the morale, health, and productivity of current employees.
According to the American Public Transportation Association, switching from driving to riding mass transit reduces CO2 emissions by 4,800 pounds per person per year.
Official Language for Qualified Transportation Fringe Benefits
IRC 132(f): Qualified Transportation Fringe Benefits
(1) In general
For purposes of this section, the term "qualified transportation fringe" means any of the following provided by an employer to an employee:
(A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment.
(B) Any transit pass.
(C) Qualified parking.
(D) Any qualified bicycle commuting reimbursement.
(2) Limitation on exclusion
The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed-
(A) $100 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),
(B) $175 per month in the case of qualified parking, and,
(C) the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.
(3) Cash reimbursements
For purposes of this subsection, the term "qualified transportation fringe" includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.
(4) No constructive receipt
No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.
For purposes of this subsection-
(A) Transit pass
The term "transit pass" means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is-
(i) on mass transit facilities (whether or not publicly owned), or
(ii) provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).
(B) Commuter highway vehicle
The term "commuter highway vehicle" means any highway vehicle-
(i) the seating capacity of which is at least 6 adults (not including the driver), and
(ii) at least 80 percent of the mileage use of which can reasonably be expected to be-
(I) for purposes of transporting employees in connection with travel between their residences and their place of employment, and
(II) on trips during which the number of employees transported for such purposes is at least 1/2 of the adult seating capacity of such vehicle (not including the driver).
(C) Qualified parking
The term "qualified parking" means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.
(D) Transportation provided by employer
Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.
For purposes of this subsection, the term "employee" does not include an individual who is an employee within the meaning of section 401 (c)(1).
(F) Definitions Related to Bicycle Commuting Reimbursement
(i) QUALIFIED BICYCLE COMMUTING REIMBURSEMENT - The term "qualified bicycle commuting reimbursement' means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee's residence and place of employment.
(ii) APPLICABLE ANNUAL LIMITATION - The term ‘applicable annual limitation' means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.
(iii) QUALIFIED BICYCLE COMMUTING MONTH - The term ‘qualified bicycle commuting month' means, with respect to any employee, any month during which such employee-
(I) regularly uses the bicycle for a substantial portion of the travel between the employee's residence and place of employment, and
(II) does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).
The 50 Corridor TMA, in conjunction with SACOG, is sponsoring a number of educational workshops on the Federal Commuter Tax Benefit. The 35 minute video below offers an introduction to the topic.