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.
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.
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.
The employer pays the full benefit and gets the payroll tax reduction and business expense.
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.
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 Transit Pass is defined as:
Qualified Parking is defined as:
In order to prove documentation for the program, it is recommended that employer maintain the following:
Working with third party vendors makes it easier to keep records and document program usage. Some of the vendors in your area include:
Found at 26 USC section 132 (f) and is available online at uscode.house.gov/search/criteria.shtml