A properly structured transit benefit program can encourage ride-sharing, help eliminate employee stress due to commuting, and may even encourage better health through walking or biking. Best of all, qualified transit benefits can reduce your payroll tax obligations and give employees another tax-free benefit.
What Are Qualified Transportation Benefits? Certain transportation benefits qualify for tax-preferred treatment. They include:
• A ride in a commuter highway vehicle between the employee’s home and workplace.
• A transit pass.
• Qualified parking.
• Qualified bicycle commuting reimbursement.
Employees can exclude the value of these benefits from their gross income for income tax purposes; the employer can exclude them from employees’ wages for payroll tax purposes. For 2014, employees can exclude a maximum of:
• $130 per month for public transit benefits, which includes mass transit and vehicles seating 14 or more passengers operated by a person in the business of transporting persons for pay or hire. (Note: this is a $115 decrease from the 2013 limit due to the sunsetting of a law requiring parity between tax-advantaged benefits for transit and benefits for parking.)
• $250 per month in qualified parking benefits. This includes parking on or near your premises or parking at the location where your employees commute to work using mass transit, commuter highway vehicles, or carpools.
• $20 per month in qualified expenses for bicycle commuting. This can include the purchase, repair, improvements and storage of a bicycle incurred during any month in which the employee regularly uses the bicycle for a substantial portion of travel between his/her residence and place of employment. He/she cannot receive employer-provided transportation in a commuter highway vehicle (such as a vanpool), transit pass or qualified parking benefits during that month.
Administering Commuter Benefits
Employers can structure a commuter benefit program in many ways.
1. Direct benefits – An employer can provide qualified transportation benefits directly to employees, by providing free parking, rides in company-provided van pools or vouchers or passes given directly to employees.
2. Reimbursement plan – Employees can set aside pre-tax dollars to use toward commuting expenses. To receive reimbursement, employees must present documentation of qualified work-related commuting expenses. Administering a reimbursement plan might cost an employer $4 to $5 per employee per month; however, the employer pays no FICA on money employees put into the plan.
Employers can usually exclude qualified transportation fringe benefits from an employee’s wages even if you provide them in place of pay. However, qualified bicycle commuting reimbursements cannot be excluded if the reimbursements are provided in place of pay. If the value of a benefit for any month is more than its limit, you must include the amount over the limit in the employee’s wages, minus any amount the employee paid for the benefit.
Self-employed individuals and 2 percent shareholders of S corporations do not qualify as employees for tax-favored treatment of transportation benefits. Treat these individuals as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions.For more information on setting up or administering a commuter benefits program, please contact us at 212-842-3700.