Good News for Employers and their Employees! Federal Tax savings are available through the use of employer-offered IRS Section 132(f) Qualified Transportation Fringe benefits. With this benefit, employers can offer their employees a tax-free way to pay for their transit and vanpooling commuting expenses and employers can reduce their payroll costs.
For example, employees can pay for their transit passes on a pre-tax basis through monthly payroll deductions. The allowable pre-tax amount for 2023 is $300 per month. So, if an employee spends $280 on transit every month, up to $3,600 a year, they can save as much as 40% of their commuting expenses. Employers save on payroll taxes (FICA) on the amount their employees use for this benefit.
Employers can setup a transportation benefit program in several ways:
Employer-Paid Transportation Benefit: Employers can pay for their employees to commute by transit or vanpool, up to a limit of $300 per month. With this arrangement, employees get up to $300 as a tax-free transportation benefit.
Employee-Paid Pre-Tax Transportation Benefit: Employers can allow employees to set aside up to $300 per month of pre-tax income to pay for the cost of using transit or vanpooling. Employers save money since the amount set aside is not subject to payroll taxes. Employees save on Federal and State taxes on the amount of their salary set aside up to the specified monthly limits.
Shared-Cost Transportation Benefit: Employers can share the cost of transit or vanpool costs with employees and everyone can receive valuable tax savings. With this approach, employers can provide a portion of the cost of taking transit or vanpooling as a tax-free benefit and allow the employee to set aside pre-tax income to pay for the remaining amount of the benefit (up to the specified limits).
Parking Cash-Out: Employers can offer their employees the option to “cash out” of their existing parking space. Cash-out programs often work best for employers that pay separately for parking and for organizations with parking shortages or plans to expand parking facilities. For example, if the employer subsidizes parking for their employees at $60 a month, a parking cash-out program would allow employees to choose from the following options:
- Keep their parking space worth $60 a month
- Give up the parking space and receive $60 extra each month in taxable salary
- Receive $60 a month in tax-free transportation benefits to pay for transit or vanpooling
For an in-depth review of Federal Transportation Benefits check the out the Transportation (Commuting) Benefits section of this publication from the IRS.