The Internal Revenue Code allows employees to use pre-tax salary towards their mass transit commuting costs. It is IRS Code, section 132(f) Qualified Transportation Fringe. As of January 1, 2018, the transit cap is $260/month. With this new cap, employees may use up to $3,120/year towards their mass transit commute without paying federal income tax on this 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. 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 $260/month in 2018. 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/month.