Section 132 (f) of the federal tax code enables employers to reduce employee’s commuting costs in several ways.
- Employer-financed: Employers may underwrite their employees’ transit or vanpool commuting costs, up to $125 per employee per month. They may offset qualified parking expenses up to $240.
- Employer perspective – Costs are a deductible business expense.
- Employee perspective – Transit, vanpool, or parking benefits are free of all payroll and income taxes.
- Employee-financed: Employers may allow employees to set aside pre-tax dollars to purchase transit passes, pay vanpool fares and to cover qualified parking costs. Monthly limits are $125 per employee per month for transit or vanpool expenses, and $240 for parking.
- Employer perspective – Employers save payroll taxes on the funds their employees set aside pre-tax, typically 7.65%.
- Employee perspective – Employees save payroll and federal income taxes on the set-aside funds. For employees in the 25% tax bracket, for example, that savings represents over three month’s work of commuting costs.
- Combined: Employers may choose to underwrite a portion of the employees’ transit, vanpool or parking costs and permit employees to set aside pre-tax funds for the remaining costs, up to the monthly limits.
- Employer perspective – The portion of costs used to underwrite commuting costs are a deductible business expense. Employers save payroll taxes on the portion their employees set-aside on a pre-tax basis.
- Employee perspective – The employer-financed portion of transit, vanpool or parking costs are tax-free. Employees save payroll and income taxes on the portion set-aside on a pre-tax basis.
More information on implementing a transit benefit is available from Metro Transit.
An employer may provide a reimbursement of up to $20 per month for reasonable expenses incurred by bicyclist in conjunction with their commute to work by bike. However, unlike other qualified transportation fringe benefits a qualified bicycle commuting reimbursement benefit cannot be funded through employee pre-tax income, nor can an employee receive both the transit and bicycle benefit in the same month. More information is available from the Pedestrian and Bicycling Information Center.