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How Does it Work?
Disclaimer: The following information on commuter tax benefits is provided for general information only and is not tax advice or legal opinion. Please consult with the Internal Revenue Service or your tax attorney for more information. Note: Please consult the IRS for the latest updated tax benefits information. It is possible that legislation regarding tax benefits may have changed since this manual was developed. Employers can increase their subsidies to Commute Solutions participants or save on the cost of providing these incentives by using commuter tax benefits—special tax code regulations that significantly reduce the cost of some commuter programs. The Internal Revenue Service Code 132 (F) allows spending up to $100 for commuter vehicles and $180 for parking, tax-free. In other words, neither the employer nor the employee pays any taxes on these costs up to these limits. Savings can be significant. For instance, Capital Metro vanpools operating out of the service area pay a per-mile fee, which can often get expensive for commutes from remote areas. If employees had to pay the entire cost of a $120-per-month vanpool fee, they might think the cost was prohibitive. But by not paying taxes on the first $100 of that fee, they save about $30, depending on their tax bracket. Suddenly, the $120 fee has plummeted to $90, making it seem much more reasonable. Because the strategy incurs very little cost to an employer and has the potential for cost savings all around, an ETC should always consider implementing a commuter tax benefit program.
How Does it Work? Unfortunately, other Commute Solutions strategies such as carpools, bicycling and walking do not receive these tax benefits. Tax benefits also are not allowed for:
What are the Limits?
How Do You
Setup the Benefits? 1) The employer covers the entire cost of the benefit. The employees do not have to pay taxes on what they receive up to the set limits. The employer also does not have to expend money for payroll taxes on the amounts up to the set limits. 2) The employer sets up a pretax system on money reserved from the employee's payroll to cover the cost of the benefit. 3) The employer and employee share the cost. Examples: 2) A company's employees are required to pay for transit and vanpool fees, but the company has set up a pretax system. The amount of the monthly passes are taken out of each employees check before being taxed. For transit riders, the $10-$17 for a monthly pass is well below the $100 limit allowed by law, as are most of the vanpooler passes at $25 a month. However, vanpool commutes from well outside the Capital Metro service area could cost each rider $120 per month. The company's payroll system does not tax the employee up to the $100 limit, but applies regular withholding of taxes to the remaining $20. The employee can also include up to $180 per month in parking in the pretax payroll system. 3) A company shares its commuter benefit costs with the employees so that each pays half. The company doesn't incur any payroll taxes for the portion it provides, nor does the employee pay any taxes on the amount received, up to the monthly limits. So bus riders get $5 for a monthly pass and cover the other $5 themselves. An out-of-service area Capital Metro vanpool that costs $120 per month to the employee would still only be eligible for savings to the $100 limit per month. The employer might pay $60 toward the pass, but only $40 of the remaining $60 would be eligible for the pretax system from the employee's payroll. Once again, the company and employee can split the cost of parking, but each only receives tax benefits up to the total limit of $180 per month. How Does the Business
Directly Benefit? How Does the ETC
Acquire and Provide Passes to Employees? Here's how the system might work for each of the commuter benefit options with the employer handling the purchase and distribution: 1) Employer covers entire cost of commuter
benefit: 2) The employer sets up a pretax system
on money reserved from the employee's payroll to cover the cost
of the benefit: 3) The employer and employee share
the cost: What if the Employee
is Responsible for Acquiring Passes? If the employer is providing the money to cover all or a portion of the cost of passes, a few rules apply, because the Tax Code prohibits cash reimbursement to employees for passes in most instances. For instance, an employer can't simply give its employees money, tell them to go buy passes and then ask for receipts. Nor can it have the employee bring them a receipt and give them the compensation (in most cases). Instead, employers have to provide the employees with vouchers purchased from a for-profit company or nonprofit group. The vouchers then can be used to pay for transit and vanpool passes from thousands of different providers around the country. Of course, most voucher companies charge employers a fee, which can add up quickly with a large number of passes. ETCs take note, because in most cases it's easy for employers to acquire passes, the following information probably won't apply to the Central Texas region. Vouchers are popular in areas where several different transit agencies and/or vanpool providers operate and it would be too unruly for an employer to handle purchases and distribution from so many entities. Or, in some instances, getting various passes out to different employees by mail could be costly. Under the Tax Code, employers only can use cash reimbursement in a couple of situations: 1) The employer can demonstrate that voucher systems are not "readily available." What "readily available" means has been a subject of ongoing debate. Voucher companies are providing their services in nearly every metropolitan area in the country, so it would seem they are "readily available" in these regions. However, the legal definition is much more involved and considers whether providing vouchers would incur "significant administrative costs" to the employer. And the definitions continue from here on! (See Resources, below, for more sources of information.) 2) Starting January 1, 2004, an employer can take advantage of the "safe harbor" rule that specifically defines "significant administrative costs" as voucher fees that are in excess of one percent of the average monthly value of the vouchers. It is anticipated that this ruling will free up many employers to offer reimbursements in the future. The point for ETCs in Central Texas is that it's preferable to have the employer handle the purchase and distribution of passes. If, for some reason, reimbursement is necessary, be sure to have a tax attorney review the code and the resources below to determine the proper course. How is Parking Cash
Out Affected? Employers benefit the most when employees use all or a portion of the cash out to pay for transit or vanpool passes. This precludes them from having to pay additional payroll taxes on the cash out as additional salary to the employee. What are the
Requirements for Pretax Payroll Systems?
A sample form is included below. Does an Employer
Have Much Flexibility with Commuter Benefits? No written plan is required for the benefit
Issues Regarding
Other Commute Solutions Strategies The employee also would need to pay taxes on the subsidy, as if it were regular income. The only exceptions are called "de minimis fringe benefits," amounts so small they are not taxed. A rule of thumb is that the amount would be $25 or less in one year. Parking costs given to participants are not taxable up to the $180 limit. Commuter Choice The Association for Commuter Transportation Internal Revenue Service IRS Ruling on 132(f) (Regarding Vouchers and Other Issues) Example of How Commuter Tax Benefits Compare to Additional Salary (Word) Example of How Commuter Tax Benefits Compare to Additional Salary (PDF) |
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