Commuter benefits, also known as transit benefits, are an employer-provided program that allows employees to reduce their monthly commuting expenses. Commuter benefits span public transit, vanpooling, bicycling, and work-related parking expenses, and they are mandatory in some cities. If your business is not in one of the mandatory locations, commuter benefits are usually a “voluntary” benefit, meaning that it is up to the employee to participate or not.
In this article, we will explain:
- What Commuter Benefits Are
- Do I Have To Provide Commuter Benefits?
- Laws Around Commuter Benefits
- Pros to Offering Commuter Benefits
- Cost of Offering Commuter Benefits
- How to Offer Commuter Benefits to Your Employees
What Commuter Benefits Are
Commuter, transit, or transportation benefits are a way for employers to provide a path for employees to use pre-tax dollars for their work-related transportation expenses. Commuter benefits started in 1993, when the IRS wanted to encourage people to use public transit (and later bicycling in 2009.)
Here’s how commuter benefits work:
- Your employee sets aside a predetermined amount (up to the limit by the IRS) to pay for their transportation costs
- Your employee receives a debit card (i.e. for transit use only, similar to what you’d get with an HSA), transit pass, or membership card, depending on the type of transit benefit they chose.
- The employee’s taxable income is lowered (by the amount set aside since it is using pre-tax paycheck dollars)
- The employer’s payroll taxes are also lowered (by the amount set aside)
Kinds of Transit Included in Commuter Benefits
The types of transportation that can be covered by commuter benefits are:
- Transportation in a personally owned vehicle, like a car, as long as the transportation is from home to work (or work to home) (client-related driving is NOT included)
- Providing a transit pass
- Providing parking spaces
- Any bicycle commuting reimbursement up to $20 per month (but this cannot be used in combination with the other 3 kinds)
There are additional regulations on each kind of transportation, which is why we recommend working with a benefits provider in order to make sure you are compliant.
Do I Have to Provide Commuter Benefits?
According to SHRM, the following locations are required to provide commuter benefits at the time of print. All of them are for businesses with 20 or more full time employees.
- New York City
- Washington, D.C.
- San Francisco (plus 9 surrounding counties)
- Berkeley, CA
- Richmond, CA
Otherwise, you do not need to provide commuter benefits, but we encourage you to consider it for the tax benefits or as an inexpensive but important benefit for your employees.
Laws Around Commuter Benefits
Currently, commuter benefits are available only through an employer; meaning, your employees cannot simply go get them on their own (unlike life insurance or dental insurance). An employee cannot get the tax credit on their own unless their employer provides these benefits. This makes it a huge win for you as the employer should you provide them — your employees save on income taxes, and you save on payroll taxes.
Limits on Commuter Benefits
At the time of press, the following limits were placed on pre-tax commuter benefits:
- For Parking: $255/month
- For Transportation like a Car or Vanpooling: $255/month
- For Bicycling: $20/month
- For Transit Passes: $255/month
Now, let’s talk about the pros and cons to offering commuter benefits.
Pros to Offering Commuter Benefits
There are a number of benefits to offering your employees commuter benefits.
1. Special State Tax Savings
If your business is in one of the following states (in blue), you can save on both federal and state income taxes, as well as payroll taxes, with commuter benefits:
For example, in NYC, if you have an employee with a tax rate of 35% who elects to pay $200 per month on transportation with pre-tax income, they can save $70 a month in income taxes, for a total savings of $840 a year. This adds up over time for the employee, as well as you are reducing nearly $1,000 of your payroll that is taxed. If all of your employees did this- you do the math on the savings on payroll taxes!
2. Federal Tax Savings
If you are NOT in one of those states, you can still save on federal taxes by offering transit benefits. They are then an employer-provided fringe benefit and can be eligible for payroll and federal tax savings when you file your business taxes each year.
3. Happier Employees (who will save on their taxes and commuting)
If your employees also pay into the benefit, they will save on their own taxes as well as they will be thrilled for the lowered commuting costs if you contribute.
4. Competitive Recruiting Position
Commuter benefits, especially in major cities like Chicago or Seattle, are a huge perk for younger employees trying to make ends meet. Attracting young talent in expensive cities is hard and this can differentiate your small business.
Cost of Offering Commuter Benefits
What is nice about the cost of offering transit benefits is that it is up to YOU as the business owner. You can offer up to the limits that the IRS sets each year, or you could offer a set amount such as $25 or $50 per month per employee. It can be an easy to administer, easy to budget for cost in your benefits program, which we will talk about how to offer it next.
How to Offer Commuter Benefits to Your Employees
There are a few different ways to offer commuter benefits to your employees. When you consider offering them, ask yourself:
Do I want to offer the benefits myself or use a transit benefit provider?
We recommend using transit benefits providers to make sure that you correctly link your payroll to the benefits, to ensure you remain compliant with laws as they change, and to take advantage of the tax breaks in the optimal way.
A few common ways to do this are to use your HR benefits/payroll software, like Gusto or a Professional Employer Organization (PEO) like Justworks. Using a third-party provider will also help immensely with the *how* part of the commuter benefits, such as making sure the right employees have the right passes.
If you want to offer the benefits yourself, you will need to set up a company account with the local transit agency and register for passes under the company name for the participating employees. You could also simply buy the passes and sell them at your workplace, although this makes the tax deductions a bit more complicated in tracking who bought what and for how much. Remember, if you are in a city that requires them, there may be a city agency that also now facilitates employers providing transit benefits. We advise you check your city’s website.
The Bottom Line
Transit benefits can be a great, low cost option for an employer like a small business to provide something for their employees. If your business is in one of the states where you can get a tax incentive for providing them, even better for your bottom line as a business owner. We recommend working with a PEO like Justworks or a benefits provider like Gusto to offer transit benefits to your employees in order to stay compliant and get the most out providing them.