Tax Benefits for Transportation Programs

Federal law now allows employers two ways to offer their employees a commute benefit free of payroll taxes: Companies can offer employees a tax-free employer-paid subsidy or a pre-tax payroll deduction (or a combination of both) to reduce an employee's cost of public transportation (bus, train, ferry or registered vanpool). The law applies in King County when the company (or qualified third party) delivers the commute benefit to the employee in the form of a pass, ticketbook or voucher. Specifically:

When the company pays part or all of the public transportation fare and delivers the benefit to the employee in the form of a pass, ticketbook or voucher:

• The employee receives the tax-free benefit of the employer-subsidized pass, ticketbook or voucher up to $115* a month.
• The employer has a tax deductible business expense for federal taxes.
• The employer may claim a commute trip credit on Washington State B&O or Public Utility Tax equal to 50% of benefit cost up to $60 per employee per year. See Washington State Department of Revenue annual application and instructions [.PDF] [external link]. Note that applications must be filed during the month of January.

When the employee pays part or all of the cost of public transportation and buys or receives the pass, ticketbook or voucher from the employer:

• The employer can allow the employee to pay via a pre-tax payroll deduction, up to $115* a month (amounts over $115 are taxable).
• The employee saves federal withholding and FICA payroll taxes on the amount deducted.
• The employer saves paying FICA on the amount deducted.
• If the cost of the transit pass or voucher exceeds $115, any amount over $115 can be deducted from employee wages on an after-tax basis.

*When the company and employee share the cost of the pass, ticketbook or voucher, the total combined tax-free and pre-tax amounts may not exceed $115 per month per employee. Here's an example: If the employee needs a $72 bus pass and the employer decides to cover $30 per month of that cost, then the employee receives a tax-free benefit of $30 and the pre-tax deduction from employee wages is $42. The employee receives the $72 bus pass from the employer.

Use Metro's Pass Sales, FlexPass or Voucher links to place an order for transportation passes or vouchers. It's the way to take advantage of the commute tax benefits which are available to employees only through a company program. Some companies opt to use a third party to administer the benefit. In King County, because of the availability of a voucher program, cash reimbursements to employees for public transportation do not qualify as tax-free benefits.

Employers are encouraged to consult a tax advisor or other professional for detailed information regarding the tax implications of commute benefits and incentives.

• For a more detailed discussion of the tax laws, see Metro's Tax Laws for Commute-related Expenses. [.PDF 116kb]
• For final IRS regulations on Qualified Transportation Fringe Benefits see the 2001 Federal Register, Vol. 66 No. 8/ Thursday, January 11, 2001/ Rules and Regulations - Pages 2241-2251, or download it as a PDF file [.PDF 156kb 11 pages]
• For additional assistance contact Employer Services by e-mail employer.program@kingcounty.gov or by phone 206-263-3444.

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