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How much would you need to earn to justify spending $12,650.56 each year on your commute? That’s the price San Francisco’s commuters pay to sit in traffic in the Golden City every day.
Admittedly, these costs sit at the top of the scale, with average annual costs around $5,750 nationwide. But whatever the magic number, employers can support their employees by offering a range of commuter benefits to offset their specific travel costs.
The question: Should employers opt for pre-tax or post-tax commuter benefits?
Employers can offer pre-tax and post-tax employee benefits, each with its pros and cons. Pre-tax deductions reduce an employee’s taxable income, meaning they take home more of the money they earn. Businesses also save money on their payroll taxes when they offer pre-tax benefits. On the other hand, post-tax deductions don’t reduce an employee’s taxable income, meaning they don’t affect earnings reported for Social Security benefits or applications for loans, mortgages, or similar.
Alongside some types of commuter benefits, other pre-tax benefits include:
This is a broader benefits category, including:
Pre-tax commuter benefits are a set amount that comes directly out of employees’ paychecks before local, state, and federal income tax is applied. IRS Publication 15-B, “The Employer’s Guide to Fringe Benefits,” strictly defines how these benefits work, including eligible expenses and monthly limits.
For 2024, the limit is $315 per month for commuter highway vehicle transportation and transit passes and a separate $315 per month for qualified parking. Annually, this means employees can allocate up to $3,780 (up from $3,600 the year before) of their pre-tax dollars for commuting costs in each category. Any costs beyond this are considered a post-tax benefit.
You won’t pay taxes on the following pre-tax benefits:
According to the IRS, a commuter highway vehicle must seat at least six adults plus the driver. Buses and some ride-sharing services fall into this category so long as at least 80% of the vehicle mileage is used to transport passengers between their homes and workplaces. Employees must occupy at least 50% of the vehicle’s seats, excluding the driver.
U.S. Code Section 132(f) defines a transit pass as a “pass, token, fare card, voucher, or similar item.” The pass is suitable for any type of mass transit, such as buses, trains, ferries, and water taxis. This benefit is only tax-free if no voucher is available for your employees. Additionally, employees are required to submit receipts as proof of payment.
Qualified parking is a pre-tax perk that lets employees use up to $315 per month of their paychecks, tax-free, for employer-provided parking at or near the business premises. This excludes parking at an employee’s residence unless it’s necessary for work (e.g., offsite meetings).
Here are three compelling reasons to incorporate pre-tax commuter benefits in your packages:
Post-tax commuter benefits are different from their pre-tax counterparts. Instead of coming out of an employee’s paycheck before taxes, post-tax benefits are deducted after all applicable taxes have been applied. Essentially, employees pay for these benefits with what’s left over after their wages have already been taxed.
Here are some of the commuter benefits that fall in the post-tax bucket:
Employers may offer gas cards or gas stipends to help their employees meet the rising cost of filling their tanks. The current average price of gas in the U.S. is $3.53 per gallon, although this varies wildly from state to state, with California’s average at $4.97 per gallon.
Tolls can also quickly add up, especially for those who want to use faster routes when they’re covering long distances. Commuters who must pay tolls on their way to work may receive tax-free reimbursement from their employer in the form of cash or E-ZPass payment collection.
The average cost of full-coverage insurance in the U.S. is $2,008 per year or $167 per month. Employers may choose to partially or fully offset these costs for their workers.
Employers may also offer company cars to cover the cost of vehicle ownership. While employers are responsible for maintenance and taxes on the vehicle, they can require drivers to keep accurate records of their mileage through a vehicle log book.
For employees who either don’t drive or prefer to avoid public transportation, ride-hailing apps like Uber and Lyft are super convenient. By securing credits in bulk from these services, employers can offer their workforce reduced ride fares.
The IRS has suspended the exclusion of certain qualified bicycle commuting reimbursements from employees’ income until 2026. Instead, employers may offer bike share programs, such as CitiBike, Indego, or Lime, as a post-tax arrangement.
The IRS provides standard mileage reimbursement rates, currently 67 cents per mile, to help employers calculate how much they should reimburse staff who use their vehicles for work purposes, including commuting.
Incentives to switch to electric and hybrid cars are increasingly attractive to eco-conscious employees and businesses alike. Offering employees the use of charging stations at work may encourage them to switch, saving them money on gas while reducing their carbon footprint.
While they don’t provide the same upfront tax savings, post-tax commuter benefits offer significant value as they:
Both pre-tax and post-tax commuter benefits offer advantages for employees who need help with the financial burden of traveling to and from work.
Benepass Commuter is a versatile package for employers who want to serve up the best of both worlds to their employees. Companies can opt for their program to be pre-tax or post-tax, adding eligible spending categories such as gas, toll roads, and bike share programs, which a strict pre-tax account would otherwise not cover. Here’s how our program works:
Ready to make tax savings on the cost of your employees’ commute? Request a free demo of our Benepass platform today or contact sales@getbenepass.com to connect with a benefits specialist.
