Pre-tax commuter benefits are a type of fringe benefit. Employees can legally put aside a portion of their pretax income every month and put it toward their commuting costs. Employees save because this money set aside is not taxed. Essentially, instead of paying (post-tax) out of pocket for transit, this benefit allows commuters to save extra money by putting untaxed income toward transit.
These benefits can be used to promote the use of alternative forms of transportation — incentivizing vanpools, biking, trains, and other transit — but they are also just a useful benefit for commuters who are hoping to save a little extra. Read on for an in-depth guide, or click on a link to jump right to the answer to your question.
How do commuter benefits work?
If pre-tax commuter benefits are sounding like something that you or your employees could benefit from, you’ll probably want to know more about how they work. Like most fringe benefits that you can implement for your employees, pre-tax commuter benefits are subject to rules and regulations. Let’s review some of those.
- First off, commuter benefits allow employees to contribute to a transit or qualified parking fund out of their pre-tax That means that money they would be taxed on, and then have to put toward their commute, instead is only put toward their commute. This may not sound like a lot, but it adds up — remember, employees go to work 5 days out of the week in most cases.
- If a company offers pre-tax transit benefits, you’ll talk to the HR department (or whoever handles employee payment and benefits) about setting up an account, as well as with accounting, to see how it might help your budget. Money from employees’ paychecks goes toward their commuter benefit fund.
- This fund can be used for a few different purposes:
- Contracting with a vanpool service for employees to use
- Loading up transit cards for public transit in your city or town
- Reimbursing commuters for their travel expenses
- The IRS maintains that pre-tax commuter benefits in 2019 must be limited to $265 a month for transit and $265 a month for parking costs.
- Any funds added to a commuter account over and above the $265 a month transit and $265 a month parking limits must come out of post-tax income.
- Funds are applied by purchasing transit cards for commuters using public transit, investing in a vanpool that picks employees up and takes them home daily (including ride-hailing services), or a direct reimbursement for bicycle-riding expenses.
Now that you get the basic idea of what pre-tax commuter benefits are and how they work, you’ll probably want to know more about what the benefits are. One thing many people are curious about when it comes to expenses related to work, or money that you spend on your employees, is whether they are tax deductible. We’ll start with that question.
Can you deduct pre-tax commuter benefits?
Pre-tax commuter benefits are a work-related expense for employees, and are an employee benefit provided by a company. So, it seems like it might make sense for them to be deductible.
Unfortunately, according to the 2019 Employer’s Tax Guide to Fringe Benefits, you cannot deduct pre-tax commuter benefits. Because these benefits are already untaxed, if you’re an employee, you can’t deduct pre-tax commuter benefits from your income taxes — the amount that’s taken out of every paycheck — when you do your taxes in April.
- If you’re an employer, you should know that you cannot deduct commuter benefits from your payroll taxes — the amount that you as an employer might pay directly based on your employees’ wages.
While you can’t deduct pre-tax transit benefits from your taxes, they can still save you a lot of money, especially in the long run. If you’re thinking about enrolling in your company’s commuter benefits program, or you’re considering setting up a fund for your company, you’ll definitely want to think about the following benefits.
What are the benefits of providing a pre-tax transit fund?
While you can’t deduct your transit benefit fund, there are still some awesome tax benefits associated with pre-tax commuter benefits.
According to the Washington Post, Americans commute longer now than they have in the past 40 years. Every minute spent on the road is a bit more gas that you’re burning, and an increased chance for an accident. Even something as seemingly trivial as a nail in your tire, pebble hitting your windshield, or simple fender-bender can mean hundreds of dollars in costs.
Costs can also get pretty high if you’re using the city bus or light rail system. With a ticket ranging between $1.50 and $3.00 on average (according to Rideshare.org), those costs can add up to over $120 a month, and maybe more if multiple transfers are necessary.
According to Pew Research, 11% of Americans use public transit regularly. However, in some regions, the percentage is much higher. In the Northeast, where urban areas are older and denser and include more public transit, 25% of commuters regularly use buses, trains, and subways. Nationally, 21% of urbanites use transit.
That’s a huge amount of people who are regularly paying to use public transit. And in places where the percentages are lower, providing a commuter benefit fund could be a great way to incentivize broader use of public transit to improve traffic conditions and also environmental sustainability.
Keeping all these commuting expenses in mind, consider these benefits to a commuter fund.
- Employees save money monthly by avoiding having their commuting funds taxed. According to BART.gov, the San Francisco Bay Area’s transit service, if an employer subsidizes their employees’ commuter fund, the savings can amount to more than an equivalent raise (under the combined $265 threshold for pre-tax commuter benefits in 2019).
- Employers also save, as that portion of the employees’ income is not added to the total to which your regular payroll tax is assessed. The benefit is a pre-tax benefit, so employee-salary based costs are lowered. If you multiply that by the number of employees you have who commute to work, that can seriously add up.
- There are also company-culture oriented benefits associated with providing a commuter fund. Employees will enjoy the benefits you’re mindful enough to provide them, and will know that their boss is looking to save them money wherever they can.
- A commuter benefit fund can add to your company’s portfolio of environmentally conscious solutions. Using a vanpool or transit card crediting system reduces the amount of time your employees spend on the road in their own cars. If you’re looking to improve your company’s carbon footprint, reducing the fuel spent by employees just getting to work is a great place to start.
- Transit can often be more reliable than individual cars. If you add up every car that needs to start properly, drive safely, and arrive at work on time, you can see that there is a significant amount of possibility for error introduced in your workforce’s ability to get to work. Using mass transit or a vanpool cuts down on that possibility for error.
$265 a month is $3,180 a year. Assuming that an employee can make full use of their commuter benefit fund, that’s $3,180 that an employee is not being taxed on — which can definitely add up and mean a lot. Plus, if you’re an employer with even just 20 employees, that’s your portion of the $63,600 that you’re not paying payroll taxes on.
Starting a commuter benefit fund
You can clearly see that pre-tax transit benefits are a win-win for employees and employers — and a win-win-win if you count the environment too!
If you’re an employee who’s looking to save money on your daily commute, or an employer who is looking to provide competitive benefits to your employees in a way that’s also beneficial to your own bottom line, pre-tax commuter benefits can be a great option. Commuters will benefit from the reduced costs associated with their commutes, and employers will benefit from reduced payroll taxes, increased employee morale, and a more eco-friendly reputation.
If your company does not have a commuter benefit program in place, you should consider starting one! You could talk to employees to find out how most people are getting to work, and see if your HR department can work on opening up a program. There are also services online that will manage your commuter benefit program, as well as multiple vanpool companies employers can contract with.
Be sure to shop around to see what your options are. If your employees are mostly riding transit already, and your company is located in the heart of a city, a vanpool might not be ideal. Be sure to get plenty of info from employees on what benefits system would suit them best.
If you need a little extra help figuring out anything tax related, feel free to reach out to our team of dedicated tax professionals.