Note: This article was originally published in May, 2015, but has been updated with current information as of October 24, 2017. This article is for informational purposes and is not meant to provide legal, regulatory, accounting, or tax advice.
2018 Tax Reform: Under the Tax Cuts and Jobs Act, signed into law on December 22, 2017, employers will no longer receive a business deduction for providing mass transit, commuter highway vehicle, or parking benefits to employees, except as required for ensuring the safety of an employee. However, state requirements remain in effect, and employees may continue to use their own pretax income for commuter benefits, via employer-provided salary reduction programs.
What are commuter benefits?
Commuter benefits are a simple way for both employers and employees to save money. Put in place to encourage the use of public transportation, these programs allow for employers and employees to use pre-tax dollars to pay for a variety of commuting expenses.
How does it work?
For employers and employees, benefits that qualify as “transportation fringe benefits,” under the law are not a part of an employee’s taxable wages. These commuter benefits are exempt from federal income and payroll taxes.
Under Federal Law, qualified transportation fringe benefits consist of:
- Transportation in a commuter highway vehicle if such transportation is in connection with travel between employee’s residence and place of work
- Transit pass (subject to certain requirements)
- Qualified parking
- Any qualified bicycle commuting reimbursement up to $20 per month (not available concurrently with any other qualified transportation benefit)
The 2018 federal monthly maximum for qualified transportation fringe benefits is $260 per month, per employee for anyone, or combination of, commuter highway vehicle transportation and transit passes, as well as $260 per month, per employee for qualified parking.
(Note: the federal maximum will be adjusted annually to reflect cost-of-living by the IRS before the beginning of the year)
Employee income that is set aside for commuter benefits up to the federal maximum is not subject to federal income or payroll taxes.
Depending on how an employer offers commuter benefits, funds can be delivered to and used by employees in a number of different ways, including:
- Employer or employer-selected provider buying passes, fare cards, vouchers or tokens and distributing them to employees
- Employer or employer-selected provider issuing debit cards and online accounts that employees can use for transit and parking
- Employer or employer-selected provider depositing funds on a smart card, like San Francisco’s Clipper card, Boston’s CharlieCard, SmarTrip in Washington, D.C., etc.
NOTE: In addition to federal law, you may also be eligible for state income and payroll tax incentives for commuter benefits, depending on your location. Some cities even require employers to provide commuter benefits to their employees under the law. Scroll down to find out more about commuter benefits in your state!
Why provide commuter benefits?
Commuter benefits programs are legally required in a growing number of locations. For instance, you must offer commuter benefits if you’re an employer:
- In the San Francisco Bay Area with 50 or more full-time (at least 20 hours per week) employees
- In San Francisco, with 20 or more full-time (at least 10 hours per week) employees nationwide
- In Berkeley, with 10 or more employees who work at least 10 hours per week
- In Richmond, with 10 or more employees who work at least 10 hours per week
- In San Francisco Airport, with 20 or more employees who work at least 20 hours per week
- NOTE: Businesses in these localities with 50 or more employees across the Bay Area, are ONLY subject to the requirements of the Bay Area Commuter Benefits Program (above) and need not also comply with the local ordinances and reporting requirements.
- In New York City with 20 or more full-time (at least 30 hours per week) employees (as of 1/1/2016)
- In Washington, D.C. with 20 or more total employees (as of 1/1/2016)
Even if your business is outside these locations, companies and employees everywhere can reap the rewards of a pre-tax commuter benefits program.
If your business is located in the following states, you and your employees can save on federal and state income and payroll taxes:
- Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, West Virginia, and Wisconsin.
While most states follow federal law, a handful of states treat commuter benefits a little differently for state income tax purposes. For instance:
- In Washington, employers who provide commuter benefits may also claim a tax credit of up to 50%, in addition to saving on state payroll taxes. Maryland and Minnesota also offer employer tax credits of 50% and 30% respectively.
- In Massachusetts, the tax breaks for qualified parking and mass transit benefits are NOT equal, with a maximum of $135 (starting in 2017) for transit-passes and commuter highway vehicle transportation and $260 for qualified parking.
- In Wisconsin, the tax breaks for qualified parking and mass transit benefits are NOT equal, with a maximum of $130 for transit-passes and commuter highway vehicle transportation and $255 for qualified parking.
- In New Jersey and Pennsylvania, ONLY employer-provided commuter benefits, offered to employees in addition to their wages, are exempt from state income and payroll taxes. Any payments for commuter benefits from an employee’s wages are NOT exempt and will be taxed as income.
- In Connecticut, vanpool vehicles may be exempt from state property taxes and may also receive a motor fuel tax refund if they meet certain requirements.
How do I enroll?
If you’re an employee:
Employees can take advantage of commuter benefits if their company has a program. Ask your HR department—both you and your company will save money.
If you’re an employer:
There are numerous ways for employers to take advantage of pre-tax commuter benefits, based on their preferred levels of contribution and involvement. Depending on your location, you can contribute to your employees’ commuter benefits, have employees deduct commuter funds from their pay and purchase passes themselves, or offer a combination of the two, all pre-tax.
Setting up commuter benefits yourself can be time-consuming, so if you’re doing it alone, think about whether you have time for setup and admin or if you’d rather use an outside service, especially if you’d like to give employees the ability to set their own contribution preferences.
Zenefits helps companies easily offer commuter benefits* alongside other benefits accounts like FSAs (flexible spending accounts). With Zenefits, employees can individually allocate funds to parking and transit and spend them with Zenefits-issued debit cards, without any additional HR admin.
Interested in using Zenefits for commuter benefits? Setup is simple—let’s talk.
Already a Zenefits HRIS customer, and want to offer your employees commuter benefits? Simply log in and request to add this simple feature today.
*Zenefits does not support bicycle commuting benefits at this time.
This post was originally published 12/22/16 and has since been updated.