Providing your employees a better way to go with a transit subsidy policy offers the employer a tax deduction for the expense and big benefits for the bottom line. Under the federal law, SAFETEA-LU, the Transit/Vanpool Benefit Program is a provision of the Internal Revenue Code that lets your company pay for the employee’s cost of commuting to work, other than driving alone. Under Section 132 (f) of the Internal Revenue Code, an employer can provide up to $130 per month, $1,560 a year, to those employees who commute by transit or vanpool (and qualified parking expenses up to $250 a month, $3,000 a year).
The employer can deduct these costs as business expenses and the employees do not report the subsidy as income for tax purposes. For example, if an employer offers an employee $1200 per year ($100 per month) in transit or vanpool benefits, it can cost the employer as little as $720 per year due to the tax savings (corporate income taxes and payroll taxes). The employee on the other hand receives the full $1,200 per year tax-free. For an employee to net $1,200 in salary, it would cost the employer over $2,000 per employee.
With transit subsidy programs, employers can offer a full to a partial transit subsidy. In St. Louis, a full transit subsidy would be $78 a month, $936 a year per employee. Some employers currently offering a full transit subsidy in the St. Louis area include Washington University; Arcturis; Boeing; The Lawrence Group; Urban Strategies, Inc., McCormack Baron Salazar Companies; St. Louis Regional Chamber; The History Museum; St. Louis Zoo; UMSL. Others offering partial subsidies include BJC HealthCare ($20) and St. Luke’s Hospital.
Advantages to employers include both a tax deduction for the expense and savings on payroll taxes, FICA, disability insurance and payments into 401(k) plans. Other benefits include:
- Reduced parking and maintenance expenses
- Improved employee benefit package
- Reduced absenteeism
- Improved employee productivity
- Good corporate standing in community
- Easier recruitment and retention
- Savings on payroll taxes and retirement programs
THERE ARE SEVERAL WAYS TO PROVIDE THE BENEFIT TO YOUR EMPLOYEES:
- An employer may provide the transit/vanpool benefit in addition to an employee’s current salary. The benefit would be free of all payroll and income taxes to the employee, and the employer would deduct the cost from their business income taxes. This is considered a transit subsidy.
- An employer may permit employees to set aside (in lieu of) some of their pre-tax income to pay for transit or vanpools. Employees would not pay income or payroll taxes on the amount of the benefit, and employers would not pay payroll taxes because the pass is seen as a benefit and not taxable salary. This is considered a pre-payroll tax deduction.
- An employer may share the cost of commuting with the employee. Employers may give their employees part of the commuting expense tax free in addition to their compensation and allow the employees to set aside part of their gross income to pay the remaining amount, up to the limit of $130.
Alternatively, employers may cover bicycle commuting expenses for employees up to $20 per month per employee.
- Workers may claim both the parking and transit benefits in the same month, but may not combine the bicycle commuting benefit with any other benefits.
These benefits are not permitted to be part of “cafeteria” plans or flexible spending accounts.
These tax-advantaged parking and transit benefits reduce the taxes paid by participating employers and employees. The parking and transit benefits may be provided either as a supplement to an employee’s pay or in place of salary or wages.