With more employees returning to the workplace and the cost of commuting on the rise, employers should consider helping to alleviate the commuting burden. Costs typically run over a $100 a month for public transportation or for driving to work (the average cost for driving is $170 per month). For example, a MetroCard for New York City public transportation is $132 per month and a monthly ticket for Metro North train between Chappaqua, NY and Grand Central Terminal is $299.75 per month.
The tax law allows special treatment for “qualified transportation fringe benefits.” However, limitations apply for both employers and employees. Here are 5 things to know about transportation fringe benefits.
1. “Qualified transportation fringe benefits” include parking, transit passes, and van pooling
Favorable tax treatment only applies to free parking (e.g., at work, a train station), transit passes for commuting, and van pooling provided to employees. More-than-2% S corporation shareholders are not treated as employees for this purpose and can’t enjoy this tax-free fringe benefit.
The dollar limit on tax-free qualified transportation fringe benefits is fixed each year—it’s $315 per month for 2024. These amounts are not subject to withholding or FICA; they are not reported on employees’ W-2s. If an employer provides a greater benefit, the excess of the monthly dollar limit is taxable compensation; it’s subject to payroll taxes and reported on the W-2.
Before 2018, there was a special tax-free benefit for bicycling, but that has been suspended through 2025. Employers may still offer a bicycling benefit, but it’s additional taxable compensation to employees who receive it.
The tax treatment for payroll purposes is explained in IRS Publication 15-B.
2. An employee can enjoy more than one benefit
An employer can reimburse an employee for both parking and transit passes, up to the applicable limits: $315/month for parking and $315/month for transit passes and van pooling, for a total of $630/month in 2024.
3. Employers cannot deduct transportation fringe benefits
While employees receive the benefits tax free, employers cannot deduct the cost. Special (complicated) rules apply to limit the deduction for rent paid by a company for space that’s used by employees as a fringe benefit.
4. Benefits can be paid through salary reductions
Employers can arrange for employees to pay for their own monthly transit passes through a salary reduction plan specifically for this purpose. Transportation fringe benefits cannot be offered through a cafeteria plan; a separate plan is necessary. Salary reductions for transportation fringe benefits are not subject to employment taxes.
An employee may cancel a compensation reduction agreement at any time during the year, as long as the cancellation is made before the employee is able to currently receive the compensation, and before the beginning of the period the benefit will be provided.
An employer can permit unused funds to be applied to subsequent months. However, an employee who has accumulated funds but is unable to use them for a qualified transportation benefit is simply out the money. For example, if an employee changes a commuting routine after salary reduction amounts have been made, the funds can’t be recouped.
5. Substantiation applies to some reimbursed benefits but not others
If an employer reimburses an employee for parking, the employee must substantiate the expense. Substantiation does not apply to monthly transit passes.
Final thought
Employees who do not receive a qualified transportation fringe benefit may not deduct the cost of commuting. It remains a personal, nondeductible, cost.
Find more blogs concerning employees’ fringe benefits here.
