Employees save on federal income taxes. Employers save on payroll related taxes.
How Commuter Tax Benefits Work
The Federal tax code allows the use of tax-free dollars to pay for transit commuting and parking costs through employer-sponsored programs. Commuter tax benefits are regulated by the Internal Revenue Code, Section 132(f)—Qualified Transportation Fringe. As of January 2013, the tax code allows tax-free transportation fringe benefits of up to $245 per month per employee for transit expenses and up to $245 per month for qualified parking (including parking at BART stations. Qualified parking is defined as parking at or near an employer's worksite, or at a facility from which employee commutes via transit, vanpool or carpool). Commuters can receive both the transit and parking benefits (up to $490 per month).
Companies can offer:
- A tax-free employer-paid subsidy
- A pre-tax employee-paid payroll deduction
- A combination of both of the above.
Employees who set aside income on a pre-tax basis for a qualified transportation fringe benefit do not pay federal income or payroll taxes on the income set aside. If you have a combined (local, state, federal) tax rate of 40% and spend $245 per month on BART fares, you will save nearly $100 each month or $1,200 a year. If you pay for monthly BART parking at $63 per month, you can save an additional $25 per month or $300 per year.
If an employer chooses instead to subsidize the benefit it is actually more valuable than an equivalent raise because of the tax advantages (for example, if a subsidy of $190 is offered, this equals roughly $317 in taxable income).
Providing pre-tax commuter tax benefits to employees can save payroll taxes for employers. The value of the benefit paid to employees is considered a tax-free transportation fringe benefit and not wage or salary compensation, therefore, payroll taxes do not apply. Employers can save roughly 9% in payroll taxes (including FICA, SUI, SDI and city taxes) on the amount employees set aside. If the employer chooses to offer the benefit in addition to salary, giving an employee $245 in transit benefits is less expensive for an employer than increasing the employee’s salary by $245.
Calculate your company’s potential savings (external link)
How to Get Started
Commuter Tax Benefit programs are easy for employers to implement. The following links will take you to some of the providers who can work with employers to make the appropriate arrangements. In addition, payroll and benefit management companies such as ADP, Ceridian, SHPS, (merged with WageWorks) and other firms can assist many employers with the implementation of a Commuter Tax Benefits program. To learn how Clipper works with your specific transit benefit program, please click on one of the links below.
Commuter Check Services
CBS Administrators, LLC
Benefit Resource, Inc.
Frequently Asked Questions About Commuter Tax Benefits (external link)
Commuter Tax Benefits Summary Table (external link)
IRS Final Rule on Section 132(f) (external link to PDF)
San Francisco Commute Benefits Ordinance (external link)
PROS AND CONS OF COMMON EMPLOYER OPTIONS FOR PROVIDING COMMUTER BENEFITS
The pros and cons of some common options available to employers for providing Commuter Tax Benefits to their employees are summarized below from the employer and employee perspectives.
Paper Vouchers: Similar to cash or a money order but specifically for the purchase of transit fare media.
Employer perspective: This option is relatively easy and inexpensive for employers although the vouchers must be distributed manually which may be challenging for larger employers. Vouchers are not tied to an individual employee allowing more flexibility.
Employee perspective: Requires employees to take voucher to a redemption location to load onto the Clipper card (some inconveniences with this process noted in BART survey). Unused funds are not refunded per IRS “no change” regulation.
Benefits by Mail and Direct Load: Tickets or vouchers are ordered online directly by participants and delivered by mail or loaded to a debit card.
Employer perspective: Good solution for larger employers and/or employers with multiple worksites. Employers don’t have to distribute benefits and employees can manage their own account online.
Employee perspective: Does not require employees to redeem vouchers.
Debit Card: Similar to a bank debit card but loaded with funds that can only be used to purchase transit tickets.
Employer perspective: Personalized and non-personalized options available. Non-personalized is easy to administer and fees can be as low as vouchers. WageWorks card and TransitCenter’s QuickPay Card can be used with Clipper Autoload.
Employee perspective: Debit cards have many of the same features as vouchers plus they can be used online and at ticket vending machines. Unused funds can be carried over. Debit cards cannot be used at locations that sell non-transit products.