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"Rarely does an employee benefit save both the employee and employer money. But through a
great twist of the tax code, you may be able to
commute with tax free dollars, and save your boss
tax dollars, too.”"
Quote from Kiplinger's Personal Finance Magazine
Reduce Your Commuting Costs by Sheltering a Portion of Your Income From Federal Taxes
It really does pay to ride transit! Federal law lets workers receive
up to $230* a month in employer-paid tax-free transit
costs, or take up to $230 a month in tax-sheltered payroll
deductions for transit costs.
The law allows employers to give their workers up to $230 each month for transit or vanpool commuting costs as a tax-free benefit.
It also allows employers to give employees the option to use
payroll deductions to avoid paying taxes on up to $230 a month in
commuting costs. Alternatively, employers can share these costs
with their workers by paying part of their monthly commuting
costs and letting workers pay the balance using
pre-tax dollars. Either way, both employers and
their employees can save money by participating in
this simple plan.
This brochure, created by the American Public
Transportation Association, provides information on
how organizations and individuals can take advantage
of the federal law that provides tax benefits for
using public transportation. The law was last revised
on February 17, 2009, by the American Recovery
and Reinvestment Act of 2009.
The Program In Brief
This summary describes federal law relating to transit commuter
benefits, also called “transit pass benefits” or “qualified transportation
fringe benefits.” Employer-paid transit commuter benefits are
passes, vouchers, or similar fare media, or sometimes just cash,
provided to employees to cover their transit or qualified vanpool
commuting costs.
Employee-paid benefits are the same benefits, paid for by reducing
the employee’s wages or salary before taxes are applied. The
law also permits employees and employers to split the costs of the
benefits.
Employees do not pay federal income or payroll taxes on transit
commuter benefits, except on the amount (if any) in excess of $230
per month. Generally, state and local taxes do not apply either.
Thus, transit commuter benefits are treated much like other commonly
available fringe benefits (e.g., employer-provided health
insurance). Employers can deduct their costs for providing such
benefits and they avoid payroll taxes on such benefits, regardless
who pays.
* Maximum benefit effective January 2009. Benefit may increase in
$5 increments, based on Cost-of-Living Adjustments.
Employer-Paid Benefits
Tax savings are available if an employer pays for the cost of the
transit commuter benefits. For example, an employer can buy transit
passes from local transit agencies and distribute the passes without
charge to employees who sign up for the program.
Transit commuter benefits provide significant benefits for employers
as well as employees. The employer’s cost of providing benefits can
be deducted as a normal business expense. And, unlike ordinary
wage payments, employers do not have to pay their share of federal
payroll taxes on transit commuter benefits. This payroll tax savings
alone is usually more than enough to cover any cost of administering
the program.
Transit commuter benefits provide significant benefits for employers
as well as employees. The employer’s cost of providing benefits can
be deducted as a normal business expense. And, unlike ordinary
wage payments, employers do not have to pay their share of federal
payroll taxes on transit commuter benefits. This payroll tax savings
alone is usually more than enough to cover any cost of administering
the program.
Finally, because federal law exempts the first $230 per
month in transit benefits from federal income and payroll
taxes, and generally state and local taxes as well,
the employer in this case effectively provides his or her
employees with a tax-free transportation bonus.
Employers can also share the cost of commuting with
their employees by paying for part of the transit commuter benefit
and allowing employees to pay for the remainder using pre-tax
dollars. That can be as much as $2,760 a year in pre-tax savings!
Employee-Paid Benefits
Employers can allow their employees to purchase transit commuter
benefits — in effect, pay for their own transit and vanpool commuting
costs — with pre-tax dollars. This is done by deducting the cost of the
transit commuter benefits received by an employee from the employee’s
paycheck each pay period.
The first $230 per month of commuting costs paid by the employee in
this way will be completely exempt from federal income and payroll
taxes, and generally state and local taxes as well.
Such pre-tax deductions from an employee’s pay are comparable to
those often used to pay for medical benefits under a cafeteria plan,
or retirement benefits under a 401(k) plan.
The law also permits employees to pay their own transit and qualified
vanpool commuting costs with pre-tax dollars.
Benefits for Federal Employees
All federal employees in the Washington, D.C., area are eligible to
receive employer-paid transit benefits up to $230 per month.
In addition, many federal agency employees across the nation
continue to receive either employer-paid transit benefits or the
option to use payroll deductions for transit use under an executive
order (#13150) from 2000. That executive order established a pilot
program to provide federal employees of the U.S. Department of
Transportation, the U.S. Department of Energy, and the Environmental
Protection Agency with employer-paid transit benefits,
and all other federal employees with the option to use payroll
deductions for transit.
How It Works
A transit commuter benefit program is simple to administer. It does
not require extensive record keeping. When passes, vouchers,
or similar fare media are available, employers need only
keep a record of the purchase of the
media. In other cases, the employer
must maintain records that
reasonably demonstrate that
any cash it pays to employees
is being used to cover
their actual transit or
vanpool commuting costs.
Employers may offer different
transportation fringe
benefits to their employees.
Nondiscrimination rules
do not apply to these benefits.
Although transit commuter benefits cannot be offered as part of
a cafeteria plan, employers may use the same forms and administrative
procedures for a transit commuter benefit program
that they use for their cafeteria plan. Employers may also rely on
other parties to administer some or all of their transit commuter
benefit program.
Who Is Eligible
Private employers, non-profit organizations, and
public agencies can provide transit commuter
benefits to employees, tax-free. Federal government
employees and members of the military services are
also eligible to receive transit commuter benefits.
Federal government employees in the National Capital Region
receive the transit benefit under SAFETEA-LU. Under an Executive
Order signed in April 2000, federal employees in other areas of the
U.S. are allowed to spend up to $230 per month of their pre-tax
income for transit benefits. Self-employed individuals, partners,
2-percent shareholders of corporations, sole proprietors, and other
independent contractors are not eligible under IRS rules.
Where to Start
First, call your local public transportation agency to see if it has
developed a transit commuter benefit program. Many transit
agencies have programs that will provide an employer with all the
information needed to establish a program. If you are unsure how to
contact your local public transportation agency, visit the APTA web
site at www.apta.com for a list of individuals who administer local
transit pass programs at agencies throughout the nation. You may
also visit www.CommuterChoice.com for more information on the
program and on service providers.
Additional Information
The pertinent law of the Internal Revenue Service
(www.irs.ustreas.gov) can be found in Section 132
in the Internal Revenue Code, Title 26 of the U.S.
Code, as modified by the American Recovery and
Reinvestment Act of 2009.
Additional information can be obtained from the
American Public Transportation Association at
www.apta.com, by clicking on “Government Affairs”
and then “Transit Commute Benefit.” The Federal
Transit Administration provides extensive materials
on its web site, www.fta.dot.gov, by searching on “Commuter Choice.” In addition, interested parties
can visit www.CommuterChoice.com, a web site
administered by the Association for Commuter
Transportation, to find local providers of the benefit.
Benefits Overview
Financial incentives have a significant impact on commute
decisions. The federal tax code provides a variety of financial
incentives related to commuter benefits for employers and
employees. The following section outlines these commuter
choice tax incentives. In addition, several states now offer
tax credits for Commuter Choice programs. Contact an
attorney or accountant for specific tax guidance.
Employer-Paid Benefits
Employers can pay for their
employees to commute by
transit or vanpool, up to
$230/month. With this
arrangement, employees
receive up to $230 monthly
in a tax-free transportation
benefit. Employers get a tax
deduction for the expense.
Employers have found that
providing transportation
benefits offers significant
savings over offering the
equivalent dollar value to
employees in the form of a
salary increase.
Employee-Paid Benefits
Employers can allow
employees to elect to
exchange up to $230/month
in taxable salary for a taxfree
transit or vanpool benefit.
Employers save money
overall since the amount
exchanged is not subject to
payroll taxes. Employees
save money, too, since the
amount of an employee’s
salary exchanged for transportation
benefits is not
subject to income tax, up to
the specified monthly limits.
Shared-Cost Benefits
Employers can provide a
portion of the cost of
taking transit or vanpooling
as a tax-free transit or
vanpool benefit.
American Public Transportation Association
1666 K Street, NW
Washington, DC 20006
202/496-4800
www.apta.com
* Maximum benefit effective January 2008. Benefit may increase in $5 increments, based on Cost-of-Living Adjustments.
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