The Internal Revenue Code permits employers to assist employees with public transit and vanpooling commutation costs. 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 is $255/month in 2017.
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 $255/month in 2017. An employee who pays to park at a qualified parking area (such as a transit station) and then takes public transit or vanpools to work can receive a combination of the parking and transit benefit, up to $510/month.
Employers are also permitted by the IRS to reimburse employees up to $20/month for reasonable expenses related to commuting by bicycle on a regular basis.