COMMUTER TAX BENEFIT
The Internal Revenue Code permits employers to assist employees with public transit and vanpooling commutation costs. This can be done in three ways:
- Direct Contribution – tax-free for employees, tax deductible for the employer
- Pre-tax Payroll Deduction- reducing tax payments for employee and employer
- A combination of the above
The pre-tax payroll deduction is the most popular benefit option.
How Does The Commuter Tax Benefit Work?
The tax-free amount is capped. The IRS sets the cap annually. The transit benefit cap is $325/month in 2025.
These funds are then excluded in the following tax calculations:
- Employee – Federal Income Tax
- Employee – Social Security and Medicare Payroll Taxes
- Employer – Matching Social Security and Medicare Taxes
Commuter Tax Benefit Example
Assume that the employee’s transit or vanpool commutation cost is equal to the new 2025 cap of $325 monthly ($3,900 annually).
Using the federal income tax bracket of 24%, an employee’s income tax savings is $936.00 a year. In addition, employees and employers avoid paying the 7.65% tax for Social Security and Medicare on the same amount, saving $298.35 annually.
The employee saves $1,234.35 annually, which otherwise would have gone to federal taxes.
The employer saves $298.35 for each participating employee.
The savings really add up!
Additional Commuter Tax Benefits
The IRS also allows a pre-tax parking benefit of $325/month in 2025. An employee who pays to park at a qualified parking area (such as a transit station) and then takes public transit or vanpools to work can receive a combination of the parking and transit benefit, up to $650/month.
Employers cannot provide tax-free bicycle commuting reimbursements. However, they may offer this benefit as a taxable option.
For more information on this benefit, contact us at tma@gmtma.org.