COMMUTER TAX BENEFIT
The Internal Revenue Code permits employers to assist their employees with public transit and vanpooling commutation costs. This can be done in three ways:
- Direct Contribution – tax free for employee, tax deductible for 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 amount that is tax free is capped. The IRS sets the cap annually. The transit benefit cap is $300/month in 2023.
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 2023 cap of $300 monthly ($3,600 annually).
Using the federal income tax bracket of 24%, an employee’s income tax savings is $864 a year. In addition, the employee and employer both avoid paying the 7.65% tax for Social Security and Medicare on the same amount, so both save $275 annually.
The employee saves a total of $1,139 annually, which otherwise would have gone to federal taxes.
The employer saves $275 for each participating employee.
The savings really add up!
Additional Commuter Tax Benefits
The IRS also allows for a pre-tax parking benefit of $300/month in 2023. 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 $600/month.
Qualified bicycle commuting reimbursements, previously allowed up to $248 per year, can no longer be provided tax-free. Employers may continue to provide the bicycle benefit as a taxable benefit.
For more information on this benefit, contact us at tma@gmtma.org.