Commuter benefits are fringe benefits that allow employees to set aside pretax money to pay for work-related transportation costs. Generally, for employees to use the benefit, their employer must set up a commuter, or transportation, benefits plan that meets the requirements of Section 132(f) of the Internal Revenue Code.
We are often asked whether or not commuter benefits are required, and the answer is...in some cities, yes. This includes:
Employers in Washington, D.C., with 20 or more employees.
Employers in New York City with 20 or more full-time, nonunion employees.
Employers in Richmond, California, with 10 or more employees working no less than 10 hours per week on average.
Employers in San Francisco, California, with 20 or more employees.
Each city has its own conditions under which transportation benefits must be extended. If you’re not sure whether you’re supposed to provide this benefit to your employees, check with your local government.
Which pretax benefits are covered under the program?
Pretax commuter benefits can be used to pay for costs associated with transporting the employee between home and work. This includes expenses for:
Mass transit or public transportation — such as a subway, bus, train or ferry, and van-pooling.
What are the contribution limits?
For 2019, an employee can contribute up to $265 per month for transit expenses and $265 per month for parking expenses — both on a pretax basis.
How does the program benefit employees and employers?
Because qualified commuter benefits are tax-free, the employee’s monthly payment is deducted from his or her wages before taxes are withheld, resulting in tax savings on federal income tax, Social Security tax, and Medicare tax.
As the employer providing the benefit, you get to save on your share of Social Security and Medicare taxes for the employee. In addition, commuter benefits are not counted as wages for federal unemployment (or FUTA) purposes.
Depending on your location, transportation benefits may or may not be subject to state and local employment taxes.
How does the Tax Cuts and Jobs Act affect commuter benefits?
Under the Tax Cuts and Jobs Act, which was signed into law on Dec. 22, 2017, employers can no longer take a business deduction for expenses incurred as a result of providing qualified mass transit and parking benefits — though these benefits remain tax-free for employees. There are a couple of exceptions to this rule. For example, the expenses are deductible if they are “necessary for ensuring the safety of the employee.”
Also, per the TCJA, qualified bicycle commuting reimbursements (up to $20 per month) are no longer excludable from employees’ income for tax years 2018 through 2025. Consequently, reimbursements that employers pay for bicycle commuting are taxable to the employee.
When weighing whether to offer commuter benefits, you will need to consider whether the law mandates it, the transportation needs of your employee population and the effects of the TCJA on commuter benefits.