Payroll 101: What Are Commuter Benefits?

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Payroll 101

In an attempt to compete for a shrinking labor pool, companies are looking for all sorts of fringe benefits they can add without breaking the bank. Commuter benefits are one option. A commuter benefit is one that can be offered fairly affordably while simultaneously helping out employees who incur expenses as a result of getting to and from work.

Do you know what commuter benefits are and how they would work for your company? If you are company owner, have you considered offering a commuter benefit? Keep reading to learn more. It might be something you can give your employees as a way of competing for the top talent in your industry.

Commuter Benefit Basics

A commuter benefit is one that allows employees to set aside pretax dollars to pay some of the costs associated with commuting. In order for an employee to utilize such a benefit, his or her employer would have to set up a qualifying benefit plan that meets IRS rules. Those rules can be found in section 132 of the Internal Revenue Code.

An employee with such a benefit would be able to use the money set aside through the program to cover things like paid parking and mass transit. The money could be used to pay for bus passes, subway tokens, and so forth. It could even be used to cover carpooling expenses.

How is such a benefit funded? At bare minimum, employees contribute up to $265 per month each for both mass transit and parking expenses. That money is tax-free, meaning it is deducted from employee pay and added to the benefit fund before income and payroll taxes are assessed. The money is not subject to taxes when used to cover qualifying expenses.

Employer Contributions

Employers may contribute to the benefit as well, but they are not required to in every case. Most states and local municipalities do not mandate commuter benefits. Exceptions to the rule include:

  • Washington, DC – Employers with 20 or more employees must offer it
  • New York, NY – Employers with 20 or more full-time, nonunion employees must offer it
  • Richman, CA – Employers with at least 10 employees must offer it if those employees work at least 10 hours per week.

The three cities listed here are just a small sampling. Cities with mandated commuter benefits all have their own rules governing them. It is up to employers to know what those rules are.

Why Employers Should Consider It

Now comes the big question: why should employers consider offering a commuter benefit if the law does not require it? There are two reasons, beginning with the fact that employees appreciate such benefits. Offering a commuter benefit demonstrates that employees are more than just numbers on a payroll sheet.

Employees get the fact that any money they set aside through such a benefit program ends up saving them at tax time. And if they are going to spend extra money to commute anyway, it might as well be tax-free.

According to Dallas-based BenefitMall, the second reason employers should consider commuter benefits is that they save on their own taxes. Again, commuter benefit contributions are tax free. That means they reduce the amount of income subject to payroll taxes. By offering the benefit, employers pay less in both Social Security and Medicare taxes.

By all accounts it would seem that a commuter benefit is a good idea all the way around. Employees and their employers both benefit via tax savings. Employers enjoy the extra benefit of being able to better compete for top talent in a tight labor market.