The federal tax code allows employers to provide both
subsidized and non-subsidized tax-free transit, vanpool and parking benefits to
employees. Commuter Check is one of the
easiest ways to save on taxes. It gives
far more after-tax value to employees than a comparable amount of taxable
salary or bonus. Employees save both
income tax and FICA/Medicare. Employers
also save FICA plus disability, unemployment, workman's compensation and other
payroll-related expenses. Commuter
benefits are authorized under Section
132(f) of the Internal Revenue Code.
Three Options to Save on Taxes
1. Pre-Tax
Salary Deduction: Money deducted from a paycheck before taxes are taken out saves employees up to $500 each year on their commute! Here’s how it works. For the tax-free maximum of $115 a month for transit ($1,380 a year) or $220 for parking ($2,640 a year), gross salary will be reduced up to $330 a month, but take-home pay falls by only $200. This equals $130 in taxes saved each month—more than $1,500 annually to use for something else! Normally, the pre-tax salary deduction option also saves employers 8% of the amount used for commuting – often much more.
2. Company
Benefit: If an employer
chooses to pay for Commuter Check, it’s like free parking or a tax-free raise
for the employee. Plus, the employer has no payroll tax on this added benefit. For example, giving salary with the same after-tax value as $1,380 in Commuter Checks would cost over $ 2,640—the difference is what’s saved in taxes!
3. Combination
Plan: Any combination of the employee-paid and employer-paid options can be offered, as long as the total does not exceed $1,380 a year for transit or $2,640 a year for parking.
Special Note for the Issue of Cash Reimbursement
In 2001, the Internal Revenue Service issued detailed
regulations on Section 132(f) to clarify and provide guidance on implementation
of the law. Notable elements of these
regulations are the requirements and conditions that must be met in order for
employers to use cash reimbursement as a way to offer the transit benefit. Generally, the regulations strongly favor the
use of fare instruments such as passes, tickets and vouchers. Further, they established strict procedures
and record-keeping (substantiation) requirements for the use of cash
reimbursement.
Special Note for Self-Employed Individuals
The IRS defines self-employed persons as individuals who are
partners, sole proprietors, or S-Corp. employees with 2% or more ownership, and
independent contractors. They are
excluded from Section 132(f). However,
they are included under earlier "de minimis fringe" regulations and
are entitled to a $21 per month ($252 a year) maximum tax-free transit benefit.