Step 1 – Employer Offers Tax-free Transportation Benefits to Employees
You, the employer, may offer tax-free transportation benefits such as transit passes and vanpool services as an employee incentive to use alternative commute options. Federal tax law allows you to save on corporate payroll taxes by deducting the full cost of these benefits as a business expense. Your employees, in turn, receive the benefit to a value of up to $115 per month on a tax free basis.
Step 2 – Employees Set Aside Pre-Tax Income to Pay for Transportation Expenses
You, the employer, may also offer your employees the option of setting aside a portion of their pre-tax income via payroll deduction that allows employees to purchase transit passes or pay for vanpool fares themselves. The pre-tax income set aside amount is tax-free up to $115 per month and allows the employee to save on personal income taxes.
Step 3 – Share the Benefit and Split the Cost
You, the employer, can also choose to split the cost of purchasing transit passes or paying vanpool fares with your employees. You cover a portion of the cost directly and your employees cover the rest out of pre-tax dollars. You and your employees can both benefit.
Employers providing transit passes or vanpools for their employees keep a record of receipts of purchase and a list of pass recipients and vanpool users. Additional paperwork is minimal. You don’t have to file a plan. The IRS does not have to approve your program. You can start your program at any time of the year. You can make it as formal or informal as you like. For details or to make sure you are in compliance, See a Tax Benefit to Use Every Day.