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Tax-Reducing Vanpool/Transit Benefits


Federal and California tax law allows employers to subsidize an employee’s commuting costs up to $230/month for vanpools or public transit. Subsidizing employee commutes with vanpool vouchers and transit passes creates greater employee satisfaction and your employees are more likely to stay with your company which means your company saves on recruitment and training costs. Incentives are paid to employees as a part of the payroll process as an addition to wages after taxes are deducted. Employee contributions are deducted from gross wages before taxes are applied. Your accounting manager will be able to help you set up a system.

Section 132 (f) of the Internal Revenue Code

The federal tax code allows employers to offer tax-free benefits for the purposes of taking transit, vanpooling, and paying for parking. These “Qualified Transportation Fringe Benefits” are deducted from corporate gross income for taxes paid by the employer. Both employers and employees save on taxes because neither pays federal income or payroll taxes on these benefits.

What are the benefits?

  • Up to $230 is excludable from gross income per month for vanpooling and transit
  • Up to $230 is excludable for parking
  • The employer can provide parking benefits with transportation benefits, as long as total does not exceed $460
  • Any amount exceeding ceiling is income

You may also offer your employees $20 per month for reasonable expenses associated with bicycling to work. Unlike other qualified transportation benefits, bicycle commuting reimbursements cannot be funded through employee pretax income.

There are several ways to implement a program

Employer Paid

The employer pays the full benefit and gets the payroll tax reduction and business expense.

Employee Paid

The employer sets up the program and allows employees to put away pre-tax income for the vanpool or transit expense, saving them taxes.

Employer/Employee Cost Sharing

The employee receives a tax-free subsidy for part of his/her commuting expense and the employer’s federal payroll taxes are reduced on the amount of the subsidy.

A Few Definitions

The IRS has specific guidelines, including the requirement that transportation must take place in a commuter highway vehicle, be provided in the form of transit passes, or be provided for parking that meets the definitions of the law. This law does not apply to carpooling, bicycling, walking, or telecommuting.

A Commercial Highway Vehicle or Vanpool is defined as:

  • A vehicle with a seating capacity of at least six adults (excluding driver)
  • 80% of mileage is for transporting employees to and from work
  • On trips during which numbers of employees commuting is half of adult capacity of vehicle, excluding the driver
  • Can be employee, employer-owned, leased, or operated by a transit agency
  • Carpools are not eligible

A Transit Pass is defined as:

  • Pass, Token, Farecard, Voucher, or similar item
  • Used on mass transit facilities (whether or not publicly owned)
  • Provided for any person in business transporting persons for compensation in a highway vehicle with seating capacity of at least six people (excluding the driver)

Qualified Parking is defined as:

  • Provided to employee by an employer
  • On or near employer’s premises
  • At a location from which employee commutes
  • Only provided to employees (driving to meeting not considered as qualified benefit)

How does the Benefit Work?

For employees

  • Qualified transportation fringe benefits that do not exceed the statutory limit are not wages for Federal Insurance Contributions ACT (FICA), Federal Unemployment Tax ACT (FUTA) and federal income tax withholding
  • The total amount is not reported on the employees’ W-2 form

For employers

  • Tax deductible as a business expense
  • No payroll taxes on the benefit paid, so saves payroll taxes compared to giving the employee a raise for the same amount
  • On Form 941-SS, employers deduct commuter benefits from taxable payroll
  • No other forms need to be filled out

What is the Necessary Record Keeping?

In order to prove documentation for the program, it is recommended that employer maintain the following:

  • Documentation on purchase of vouchers
  • List of program participants
  • Enrollment/registration forms filled out by employees showing willingness to participate
  • Authorization forms that allow employers to set aside wages for “qualified fringe transportation benefits”
  • There are no further substantiation requirements if employer distributes vouchers
  • Cash reimbursements require a record
  • No written plan necessary/do not have to ask IRS for permission to implement a program

Working with third party vendors makes it easier to keep records and document program usage. Some of the vendors in your area include:

Vanpool

Transit

Where Can I find the IRS Code?

Found at 26 USC section 132 (f) and is available online at uscode.house.gov/search/criteria.shtml