Employer Provided Transit Benefits – What Can You Provide Tax-Free to Your Employees?July 16, 2014
Karen L. Cosgrove, CPA
Transit incentives are a popular transportation fringe benefit for many employees. Although the costs of commuting to and from work are not tax deductible (except in certain relatively rare cases), transportation fringe benefits help to offset some of the costs, including the expenses of riding mass transit or taking a van pool to work. Under current law, the value of qualified transportation fringe benefits provided to an employee is excluded from the employee's gross income and wages for income and payroll tax purposes.
Qualified Transportation Fringe (QTF) Benefits Include:
- Transportation in a commuter highway vehicle if the transportation is in connection with travel between the employee's residence and place of employment (for example, van pooling);
- Transit passes;
- Qualified parking; and
- Qualified bicycle commuting reimbursements (purchase, maintenance, repair and storage expenses related to bicycle commuting).
Employers have some latitude regarding which, if any, transit benefits they want to offer. An employer may simultaneously provide an employee with any one or more of the first three qualified transportation fringes. However, an employee may not exclude a bicycle commuting reimbursement for any month in which he or she receives any of the other incentives.
For 2014, the maximum that may be excluded is $250 per month for qualified parking and $130 for transit passes and van pooling. The exclusion for qualified bicycle commuting reimbursement is limited to a per-employee limitation of $20 per month multiplied by the number of qualified bicycle commuting months during the calendar year.
Excluded From Gross Income
As long as the amount of the transit pass, qualified parking or other benefit does not exceed the statutory monthly limits, the amounts are not wages for purposes of Social Security and Medicare, the Federal Unemployment Tax Act (FUTA), and federal income tax withholding. However, if the amounts do exceed the statutory limits, the excess must be included in the employee's gross income.
At the end of 2013, the monthly cap on the transit passes and van pools of the commuter benefit dropped to $130 per month from $240 per month because transit benefits parity expired. Parity could be restored and made retroactive to January 1, 2014. In April, the Senate Finance Committee approved the EXPIRE Act, which would restore parity by increasing the transit pass and van pool benefits to $250 per month, the same amount as parking. The EXPIRE Act is not a permanent fix, and the bill would extend parity only through the end of 2015.
The EXPIRE Act also includes special treatment for bikeshare costs. In 2013, the IRS announced that bikeshare arrangements would not be treated as a transportation fringe benefit unless Congress makes them so. The EXPIRE Act modifies the definition of qualified bicycle commuting reimbursement to include expenses associated with the use of a bikesharing arrangement.
Retroactive extension of transit benefit parity would create some administrative challenges for employers. The last time there was a retroactive extension, the IRS provided special guidance to employers on how to account for the retroactive change when filing employment tax returns and Forms W-2. The IRS would likely do the same if there is a retroactive extension of transit benefit parity to January 1, 2014.
For more information please contact Karen Cosgrove at email@example.com or 860.561.6859.
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