The Internal Revenue Code (section 132(f) Qualified Transportation Fringe) allows employees to use up to $265 per month of their pre-tax salary towards their mass transit commuting costs. Employees may use up to $3,120 per year towards their mass transit commute without paying federal income tax on their salary.
This can be done in three ways:
- Direct Contribution – tax free for employee, tax deductible for employer
- Pre-tax Payroll Deduction- reducing tax payments for employee and employer
- A combination of the above
The pre-tax payroll deduction is the most popular benefit option.
How Does The Commuter Tax Benefit Work?
The amount that is tax free is capped. The IRS sets the cap annually. The transit benefit cap as of 2019 is $265 per month. These funds are then excluded in the following tax calculations:
- Employee – Federal Income Tax
- Employee – Social Security and Medicare Payroll Taxes
- Employer – Matching Social Security and Medicare Taxes
The IRS also allows for a pre-tax parking benefit of $265 per month in 2019. An employee who pays to park at a qualified parking area (such as a transit station) and then takes public transit or a vanpool to work can receive a combination of the parking and transit benefit up to $520 per month.
Qualified bicycle commuting reimbursements, previously allowed up to $240 per year, can no longer be provided tax-free. Employers may continue to provide the bicycle benefit as a taxable benefit.