Employers that implement commute subsidy programs for employees should be aware of several relevant state and federal tax law regulations. Questions regarding interpretation or administration of tax codes should be directed to your company's tax attorney, legal counsel or accountant.

Federal law: Refer to Transportation Equity Act (TEA-21), Section 9010 which will amend the Internal Revenue Code Section 132(f).

Both TEA-21 and the Internal Revenue Code (IRC) are available on the Internet. You'll find the full text of TEA-21 at: http://www.fhwa.dot.gov/tea21/index.htm.

Section 132(f) of the IRC is available at:
http://www.fourmilab.ch/ustax/www/t26-A-1-B-III-132.html

How will a subsidy impact your employee's taxable income?

Please note: at this time, state agencies cannot offer a pre-tax benefit.

All employers- public and private, profit and non-profit- must withhold certain taxes on employee income.  Employers and employees share the responsibility of paying Social Security taxes, Medicare and Federal and State unemployment taxes.  The amount of these taxes is based on the amount of taxable employee income.  So, increasing employee income increases the amount of these taxes and decreasing employee income decreases the amount of these taxes for employers and for employees.

According to the IRS, commute subsidies are a fringe benefit.  IRS Publication 535: Business Expenses defined fringe benefits as:

"A form of compensation provided to any person for the performance of services by that person."

Fringe benefits must be included in employee's taxable income unless the benefits are specifically excluded from income by law (or the employee, not the employer, pays for the benefit).

In the case of commute subsidies, there are three types that are specifically excluded from income by law.  They are referred to as qualified transportation fringe benefits because they qualify under IRS rules for exclusion from the gross income (i.e., taxable income) for an employee.  They are:

• A ride in a commuter vehicle such as a vanpool (limit of $100 per month)
• A transit pass (limit of $100 per month).
• Qualified parking (limit of $175 per month).

Employers can provide up to $100/$175 (2001 tax year) per month to help employees defray costs of commuting without creating additional income for the employee or subjecting itself to increased payroll taxes.  Any amount in excess of $100/$175 per month is subject to income and payroll taxes.

Employers wishing to provide tax-exempt bus/vanpool subsidies to their employees can:

• Give $100 per month in tickets, vouchers or bus passes to an employee;
• Sell a pass or tickets to an employee at up to a $100 discount per month;
• Reimburse an employee for bus/vanpool expenses up to $100 per month.

As a result of TEA-21 and the Taxpayer Relief Act of 1997, transit and vanpool qualified transportation fringe benefits can now be applied in the following ways:

A. Benefits in Addition to Compensation (employer pays)
B. Benefits in Lieu of Compensation (employee pays)
C. Combination (employer/employee split the cost)
D. Parking Cash Out

A. Benefits in Addition to Compensation: Employers may give their employees a tax-exempt benefit of up to $65 per month to commute to work by transit or eligible vanpools. The employer pays for the benefits and receives an equivalent deduction from its business income.  Employees receive the benefit completely free of all payroll and income taxes in addition to their current compensation. (Employers can provide taxable benefits for other all modes.)

B. Benefits In Lieu of Compensation: Employers may permit their employees to set aside some of their pre-tax income to pay for transit or eligible vanpools.  Employers do not pay for the benefit but permit employees to set aside part of their gross income (in lieu of compensation) to pay for commuting expenses up to $100 per month.  Employees save on payroll and income taxes since their salary is reduced by the amount of the benefits before tax is calculated.  Employer's payroll costs are decreased since income is reduced before payroll taxes are calculated. Note: This option is not currently available to state agencies.

C. Combination: Employers may share the cost of commuting with their employees.  Employers can give their employees part of the commuting expense tax free in addition to their compensation and allow the employee to set aside part of their gross income (in lieu of compensation) to pay the remaining amount, up to the total monthly limit of $65.  For example, the employer could provide the employee with a transit subsidy of $35 (in addition to salary) and the employee could use pre-tax income for the additional amount necessary to purchase the pass.  The employee would have a total monthly transit benefit of $65. Employer's payroll costs are decreased since income is reduced before payroll taxes are calculated. Note: This option is not currently available to state agencies.