Transportation costs related to getting to and from the workplace are rarely comparable to a person’s healthcare expenses. However, vanpools, transit passes, parking fees, and associated expenses are still significant. To ease this financial burden, the IRS created a way for commuters to save money on these work-related costs. Commuter benefits have become a staple in many employer benefits plans, especially in major metropolitan areas throughout the United States.
What’s Included in Commuter Benefits
The formal designation for federal commuter benefits is the “Qualified Transportation Fringe Benefit.” Consisting of a voluntary benefits program regulated by IRS Code Section 132(f), the regulation allows employers to provide pre-tax transportation benefits to their employees.
Under a commuter benefits program, employees can pay for qualified transportation expenses with pre-tax income. Qualified expenses include:
- Riding in a commuter vehicle (vanpool) between the employee’s home and place of employment
- Transit passes (trains, subways, buses, etc.)
- Qualified parking fees
These qualified commuter benefit expenses offer tax advantages to employers and their employees. Employers do not have to include them as part of an employee’s wages when calculating payroll taxes. Meanwhile, the expenses are excluded from an employee’s gross income for income tax purposes.
How Commuter Benefits Work
The commuter benefits tax break can only be offered as part of an employer benefits plan. The benefits can be managed in one of three ways:
- Employees pay for their commuter expenses with pre-tax income deducted from their paychecks. They pay no taxes on the deductions, and the employer benefits from lower payroll taxes.
- Employers pay for an employee’s transit, vanpool, or parking expenses. In return, the employer receives a tax deduction for the amount up to the monthly limit for each commuter.
- The employer and employee share the costs by combining options one and two.
The following chart, which comes from IRS Section 132(a), describes the types of expenses that can be paid for with setaside funds. Monthly pretax deduction limits, which are periodically adjusted by the IRS (usually annually), are also listed.
Commuter Benefits Chart
|Transit Pass||Any pass, token, fare card, voucher, or similar item for mass transit (bus, subway, train, ferry) OR a vehicle (operated by a third party) that sits at least 6 people, not including the driver|
|Parking||Parking lot fees for parking near the business premises or commuting site|
|Commuter highway vehicle||Any highway vehicle that seats at least 6 adults, not including the driver|
Monthly Pretax Deduction Limits for 2023
Perks of Commuter Benefits Plans
With commuter benefits plans, both employers and employees enjoy some tax savings. If the plan is offered as a pre-tax contribution, the employer saves money on payroll tax matching since the pre-tax exclusion doesn’t count toward an employee’s official compensation. Employees save on pre-tax contributions to their commuter plan because it reduces their total taxable income.
An additional perk for those with a commuter benefits plan may be an account-linked debit card. The card connects directly to the account in which employee deductions have been set aside and deducts from the balance to cover a qualified transaction. This can help account holders keep better track of their transit purchases, and they don’t have to worry about filing claims for reimbursement. Some debit cards feature transit restrictions which allow the card to only be used where transit fare is sold, which provides enhanced security and reduces fraud.
Talk to your company or benefits administrator about commuter benefits, to see if you can save on those travel-related costs.
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