Commuter Tax Incentives
A win-win-win situation
Increase your employees' take-home pay without increasing your payroll! The Commuter Tax Benefit is a win-win-win solution that enables businesses and workers to keep more money in their pockets, while encouraging the benefits of diverse Commuter Options and reducing traffic congestion and greenhouse gas emissions. As an employers, you can offer a valuable benefit to employees at a considerable savings over offering the equivalent cash value in the form of a salary increase.
To calculate an estimated savings to your business through using this federal tax benefit, try Connecticut Commuter Services' tax benefit calculator.
How does the commuter tax incentive work?
Federal tax code allows up to $230 a month ($2760 a year) to be set aside tax free to pay for qualified commuter expenses. These can include bus, vanpool, and sometimes carpool or bicycling expenses, and others. Up to $230 a month ($2760 a year) can also be set aside tax-free to pay for qualified parking.
Read on for more information...
or to find tips on what, when and how to implement commuter benefits at Best Workplaces for Commuters. You can also reference the Transportation (Commuting) Benefits section of federal Publication 15-B (2010), an Employer's Tax Guide to Fringe Benefits.
Does the employee or employer pay for commuting costs?
Employers can use the Commuter Tax Incentive to offer a Commuter Benefit in three ways:
- Permit employees to set aside some of their gross income to pay for qualified commuter costs and/or parking, up to the limit. Both employees and employers save on payroll taxes, and employees do not pay income taxes on the money.
- Cover the commuting expense up to the limit, such as providing bus passes or vanpool subsidies. The employee receives the value of the benefit free from payroll or income taxes. The employer pays no payroll taxes on the benefit, and deducts the cost as an expense when filing business income taxes.
- Increasing employee productivity, health and morale
Many third-party providers offer administration of Commuter Tax Benefit as part of their employee services package.
What other flexibility do employers have?
The Commuter Tax Benefit requires no plan filings, forms to fill out or mandatory enrollment dates. You can offer it to all or just some of your employees. If you decide to provide the commute benefit in addition to compensation, you can use it as an annual benefit or as a reward, incentive or bonus. You can set up Commuter Tax Benefit to meet your own needs.
What is the bicycle commuting benefit?
Employers are also allowed to encourage bicycle commuting and its benefits to both employers and employees by reimbursing for bicycle-commute-related expenses, up to $20 a month, or $240 a year. For each month that an employee "regularly uses" a bicycle for a "substantial portion" of travel between home and work, "reasonable expenses" include:
- The purchase of a bicycle
- Bicycle improvements, repair and storage
Unlike other commuter options, employees cannot set aside their own tax-free money for bicycling expenses. This benefit must be paid by employers.
What is parking cash out?
Employers may establish a "parking cash out" program whereby employees may choose to "cash out" the value of employer-provided parking, forego parking and receive the taxable cash value of the parking or receive a tax-free transit or vanpool benefit of up to $230 per month. If the employee accepts cash instead of a tax-free transit or vanpool benefit, then the employee will have to pay payroll and income tax on the amount, and the employer will incur payroll taxes on the cash value.
Parking cash out works like this: the employer establishes a monthly value for a parking space at its site. Each employee could then choose among various commuting options in the following manner:
- Keep the parking space with no charge
- Give up the parking space, commute via transit or vanpool and receive the amount of the parking space value in tax-free payment of your transit or vanpool fare
- Join a carpool and agree to give up all but one of the carpoolers' parking spaces. The carpoolers receive a share of the taxable cash payment each month
- Give up the parking space and choose to bicycle or walk to work and receive the value of the parking space in taxable income
