This article contains general information but is not intended to be construed as tax advice. Each business and situation is different, so please consult with a tax professional to help you make the right choices for your company.
Unless you work from home, getting from your bed to your desk can be quite the rigamarole each morning. Commuting is a daily ritual for most Americans, with the average trek clocking in at around 26.6 minutes. Luckily, there’s a way for you to make those morning and afternoon jaunts a little more bearable. Say hello to commuter benefits.
Put simply, commuter benefits are perks you give your employees to help them save money on their expenses related to traveling to and from work. They encourage folks to take public transportation and can also help you and your team shrink your tax bill. They’re so neat, in fact, that a few cities across the U.S. require that certain companies provide them to their teams. So should you hop on the commuter benefits bandwagon (er, city bus)? This starter kit will help you make an informed decision.
Commuter benefits, deciphered
A commuter benefit is a type of qualified fringe benefit: a tax-saving program that lets you set aside money for your employees to pay for qualified transportation to and from work. Commonly, the program takes the form of an employer-funded (deductible!) account. The account has dollars which are not taxed so long as employees only use them to pay for qualified transportation to and from work. (No, they can’t use the money at that delicious sushi bar for lunch.)
The financial side
How do commuter benefits help me and my employees save on taxes?
Employees can make pre-tax contributions for commuter benefits, which lowers their taxable income. That amount is not subject to income or FICA taxes. Employees’ pre-tax contributions would also reduce your share of Social Security and Medicare tax (up to 7.65 percent).
This part is huge. Let’s say your employee spends $130 a month on their subway pass. If they’re taxed at 35 percent, they could rake in savings of up to $546 a year, while you both would save up to $119 a year on FICA payroll taxes.
If your employees are lower income, the benefits could actually decrease the refund they might get under the Earned Income Tax Credit (EITC). Make sure your employees talk to an accountant or tax professional before signing up.
How much am I allowed to contribute?
Commuter benefit accounts can be funded by both employers and employees. Your maximum contribution per month depends on what your team is putting in. In 2019, both you and the employee can collectively contribute up to $265 a month in pre-tax dollars toward parking and another $265 toward transit. You can even do a combination of both benefits up to each one’s limit! The amount funded by the employee is then taken out of their paycheck, completely tax-free, which in turn lowers their gross income. Contributions beyond the limits are taxed as an unqualified fringe benefit.
What happens if your team doesn’t reach the contribution limit? No worries. They’ll save money on whatever it is they actually spent that year. Keep in mind that this money doesn’t expire while employees are at your company, but it’s no longer accessible if they leave.
Wait a sec. What’s a fringe benefit?
A fringe benefit isn’t that out there. Qualified fringe benefits are excluded from income, or in other words, they’re tax-free. These include the commuter benefits you’ve gotten to know already, as well as some employee discounts and small non-monetary rewards (such as tickets to a game). Unqualified fringes are subject to taxes, and they include gym memberships, cash awards, or any fringe benefit above the excludable amount. These benefits are reported on your team’s W-2s.
The logistics side
What commuter benefits qualify?
- Parking near work (or where you take public transit)
- Public transit (this includes things like fare cards, tokens, passes, etc.)
- Bike maintenance costs (limited to $20, which is a lot less than the parking and transit limit of $255). Update: Unfortunately for our bicycling friends, this benefit was suspended until January 1st, 2026 in the recent tax reform bill.
- Lyft Line and Uber Pool (depending on where you live). This is subject to some requirements, but if your team uses an approved commuter card, they’ll make sure you get a proper, qualified ride.
What isn’t covered under commuter benefits?
- Gas and mileage
- Car insurance
- Wear and tear on your car
- Highway and bridge tolls
- Taxis, full-price Ubers and Lyfts
- Parking that isn’t near your office or where you park to take public transportation
Acing the decision
Should I offer commuter benefits?
First, find out if you live in a place where you’re required to offer them. Right now, there are a handful of cities and counties that have commuter benefit laws.
Some of those places include:
|City||Yes, you have to offer them if you have…|
|San Francisco, CA||20 or more full-time employees|
|Richmond, CA||10 or more employees who work an average of at least ten hours per week|
|Berkeley, CA||10 or more full-time employees|
|New York City||20 or more full-time employees|
|Washington D.C.||20 or more full-time employees|
If you operate in any of these cities, all of your employees don’t have to take advantage of the benefit, but you are required to offer it. City not listed? Don’t worry, you can still add them to your benefits package.
How do I give my employees commuter benefits?
Let’s get this show on the road. First, decide if you want to offer it yourself or go through a benefits provider, like Gusto. The good thing about having another company manage commuter benefits is that it helps you deduct the correct amount from payroll while helping you follow the encyclopedia of laws on the federal, state, and local levels.
If you decide to do it yourself, talk to an accountant or tax professional to make sure you account for all of these things.
There are a few ways you can set up a commuter benefits program:
- Employee-paid benefit: The most popular method is to make it a pre-tax benefit, which saves both you and your employees on taxes (income tax for them and payroll taxes for you).
- Employer-subsidized benefit: The next most common method is to give employees money each month to help them pay for transit and/or parking. You can pay 100 percent of the benefit or contribute a certain percentage. (Side note: This actually leads to more money for your employee than a bonus in the same amount, thanks to the tax savings.)
- Get your own transportation: And the less popular option, which is probably only feasible if you’re a larger company, is to provide some kind of shuttle service.
The amount you subsidize is completely up to you. Do research on how much different modes of transportation cost in your area. You could cover the cost of a monthly metro pass or give them an amount that matches the cost of a monthly parking pass in a local garage. Depending on the type of benefit they select, your employee may receive a nifty little debit card they can use to pay for these costs.
What else do I need to know?
- Only employees can be covered with a commuter benefit, not their spouses or dependents.
- Employees can sign up throughout the year, not just during open enrollment.
- In 2019, the limit is $265 a month or $3,180 a year each for parking and transit. You may provide both.
- Your employees’ funds can roll over from month to month. And the funds never expire.
- If managed properly, your commuter benefits provider should keep the documentation necessary so that your team doesn’t need to hold onto receipts.
Even if you’re not required to offer commuter benefits, there are a bunch of reasons you might want to anyway. Employee retention, payroll tax savings, and helping the world stay a little bit greener are just a few of the things that happen when your team gets a much-needed break on their daily race to work.