Commuter Benefits

If you’re an employer negotiating benefits with a prospective employee, your first point of conversation is likely going to start with their overall compensation package. One increasingly common benefit being offered is a commuter benefits package. Commuter benefits can help reduce employee expenses for traveling to and from work, helping them pay for mass transit and parking expenses.

How do commuter benefits work exactly and what are the advantages to both employees and employers? Read on to learn more about commuter benefits, what they cover and what tax laws companies need to adhere to if they reside in cities such as San Francisco/Bay Area, Seattle, Washington D.C., and New York City.

Commuter Employee Benefits

We had touched on commuter benefits in a previous article, but quickly realized that the topic was too important to not expand on. From a high level, commuter benefits are categorized as a ‘qualified transportation fringe benefit’ by the IRS. This allows employees and employers to use pre-tax dollars towards commuting expenses which varies based on cost-of-living adjustments. For 2021, the IRS released guidance for employers that increased the monthly maximum limit from $265 to $270.

Commuter benefits can be structured in a variety of interesting ways, but the most common way of structuring this arrangement is via an employer-funded account. This account is configured so that employees can only use them to pay for qualified transportation to and from work if they want their dollars to be tax-deductible.

What’s the Extent of Commuter Benefits Tax Deductions?

A company can save up to 7.65% per employee when employees cover their commuting expenses with pre-tax dollars, since payroll taxes are not paid on these expenses. If you’re an employer with 100 employees participating in the commuter benefits program, this averages to a monthly deduction of over $2000/month or roughly $20/employee/month. Even if your company doesn’t have 100+ employees, commuter benefits could still save your organization thousands of dollars every year while helping you retain more employees.

In the past, employers who preferred to offer subsidies were not responsible for payroll taxes on the funds contributed. With these subsidized commuter benefits, the employer would have provided the employee(s) a set amount of funds to offset parking and/or mass transit expenses. Before 2018, this subsidy was treated by the IRS as a general business expense, allowing employers to reap the benefits of tax-free commuter benefits if they chose to go this route until the law was recently changed.

Key City and State Commuter Benefits Laws

While the IRS determines tax deductions and limits for employee contributions for each company, there are several notable cities that have more stringent commuter benefits laws. In bustling metropolitan areas such as San Francisco/Bay Area, Seattle, Washington D.C., or New York City, a majority of employees take public transportation to get to work. If you operate in any of these cities, all of your employees don’t have to take advantage of the benefit, but you are required to offer it:

City	Must offer commuter benefits if you have…
San Francisco, CA	20 or more full-time employees
Richmond, CA	10 or more employees who work an average of at least ten hours per week
Berkeley, CA	10 or more full-time employees
Seattle, WA	20 or more full-time employees
New York City	20 or more full-time employees
Washington D.C.	20 or more full-time employees

Statistics on the Benefits of Offering Commuter Benefits in the U.S.

According to Haven Life, nearly 9% of American workers traveled an hour or more each way on their commute. Another study found that one in four Americans workers have quit their job because of their commute. WorkPlaceTrends.com found that 29% of people would leave their jobs “for matters of convenience” like “if their commute was too long or they didn’t like the area where the company was located.”

All in all, commuter benefits help you attract employees because they are fringe benefits — small but meaningful perks that come with working for the company. In a competitive labor market, fringe benefits help sell your company as a desirable place to work. Unfortunately, just 14% of U.S. businesses offer a transit subsidy (i.e. commuter benefits) while 12% offer qualified transportation spending accounts.

Getting the Most Out of Your Company’s Commuter Benefits

The most difficult part of an employee’s day is their commute to work, which sets the stage for the day. Typical commuters now spend 20 more minutes a week commuting than they did a decade ago, with most averaging a commute of 52 minutes roundtrip.

By contributing toward all or a portion of your employees’ commuter expenses, you show them that you are invested in them. This can lead to intangible savings due to an increase in employee retention, happiness, productivity and much more. If nurtured appropriately in a metropolitan city, your company could become a popular place where high caliber employees want to work if you offer them enticing commuter benefits.

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*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

Last Modified
June 19, 2023

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