For many employees, traveling to and from work can get expensive. The cost of toll roads, parking, and train or bus tickets can add up to a substantial amount over the course of a year. As an employer, you need your workers at work on time so that you can keep productivity and profits moving forward. You don't want commuting issues to interfere with attracting the best workers. Employer-paid travel expenses can help both of you.
Paying for some of your employees' travel expenses have tax benefits as well, for both the employer and employee. Qualified transportation fringe benefits are certain types of travel expenses that get favored treatment under the federal tax code:
- Qualified parking
- Transit passes
- Transportation in a commuter highway vehicle
- Qualified bicycle commuting reimbursement
There are restrictions and limitations on these fringe benefits, but because the potential tax savings are significant, it's a good idea for both employers and employees to know how qualified transportation fringe benefits work.
There are four types of benefits that you can give to your employees to offset the costs of traveling to and from work that qualify for special tax treatment:
This is parking provided by you for employees that's:
- On or near your business premises, including on land you own or lease, or
- At a location from which the employee commutes to work by some other means, such as a train or car pool
For example, if your worker drives from her home to a commuter railway station where she parks her car and takes a train to work, and you pay for her parking costs at the station, it's a qualified benefit.
A transit pass is a pass, token, fare-cared, voucher, or something similar that allows your employees to get transportation on things like:
- Mass transit systems
- Highway vehicles that seat at least six adults (excluding the driver) and are operated by hired drivers, that is, they get paid by a public or private company to drive your workers and others to their destinations
Commuter Highway Vehicle
Transportation in a commuter highway vehicle, which is often called "van pooling," typically involves providing transportation between an employee's home and the workplace. To qualify for tax-favored treatment:
- The vehicle must have a seating capacity of at least six adults (excluding the driver)
- At least 80% of the vehicle's mileage for a year must reasonably be expected to be for transporting employees between home and work, called commuting trips, and
- On commuting trips, the number of employees transported is reasonably expected to be at least one-half of the adult seating capacity of the vehicle (excluding the driver)
Qualified Bicycle Commuting Reimbursement
New for 2009, an employer can provide reimbursement to employees for reasonable expenses for bicycle commuting including:
- Buying a bicycle
- Expenses for bike improvements, repair and storage
An expense is reasonable if an employee uses his bike regularly for travel between his home and work place. For payments to be excluded from wages, employees can't receive reimbursement for bicycle commuting in the same month they receive other qualified transportation benefits.
Tax Benefits & Limitations
The tax benefits of qualified transportation fringe benefits can be huge for employees. Generally, the amount of benefits that your employer gives you for these benefits is excluded from your wages. In other words, you get tax-free money from your employer to pay for or cover your qualified transportation expenses.
Usually, this money is either paid to you by your employer outright, in addition to your regular salary, or you have to pay the costs and get reimbursed by your employer. Also, in recent years, a new tool allowed by a federal law has gained popularity. Similar to healthcare flexible spending accounts, transportation accounts allow you to set aside a portion of your pre-tax income to use for qualified transportation expenses. The money set aside is not taxed, which can mean substantial savings for you on your taxes.
There are limits to how much money can be excluded from your wages, though:
- $120 per month for commuter highway vehicle transportation for 2009 (it's $115 per month for 2008)
- $120 per month for transit passes for 2009 (it's $115 per month for 2008)
- $230 per month for qualified parking for 2009 (it's $220 per month for 2008)
- $20 per qualified bicycle commuting month starting in 2009
These benefits have been increased by the American Recovery and Reinvestment Act of 2009. Starting in March 2009, and through December 2010, The monthly exclusion for employer-provided transit and van pooling benefits are increased to the same level as employer-provided parking - that's almost double the former amount.
There are some other important restrictions. For instance:
- The commuter highway vehicle transportation and transit pass benefits are combined, so, if you get both benefits from your employer, the most that can be excluded from your wages is $120 for 2009 ($115 for 2008)
- Any amount that you receive from your employer that's more than the fair market value of the benefit is included in your wages and gross income, and so it's taxed. For example, if your employer pays you $120 per month for van pooling, $60 has to be included in your wages (($120 - $115) x 12 months, based on 2008 amounts)
Employers get tax savings. You save payroll taxes on the amount of benefits that you exclude from your employees wages, and you can take a tax deduction from your business's income taxes for the money you provide to them for the benefits.
Questions for Your Attorney
- I work for a large construction company. Can I start my own van pooling service and use it to transport myself and my co-workers to job-sites, and still take advantage of the tax benefits for qualified transportation expenses?
- If I and several co-employees car pool to work and park in a privately owned garage, which of us gets the parking fringe benefit? All of us? Just the person who drives?
- Are there tax benefits if I ride my bicycle to work?
- Do I have to offer qualified transportation fringe benefits to all of my employees?