Commuter Tax Benefits:


Implementing Commuter Benefits

as One of the Nation’s

Best Workplaces for CommutersSM

United States Environmental Protection Agency 

Office of Air and Radiation 

November 2005 
Commuter Tax Benefits 

Implementing Commuter Benefits 

as One of the Nation’s 

Best Workplaces for CommutersSM 

X The Federal tax code allows tax-free transportation fringe benefits of up to $105 per month per employee 

for transit or vanpool expenses and up to $205 per month for parking. 

X The employer can cover the cost of the tax-free transportation fringe benefit, allow employees to reserve 

income on a pre-tax basis to cover the cost, or share the cost. 

X Providing commuter tax benefits to employees can save payroll taxes for employers. The value of the benefit paid to employees is considered a tax-free transportation fringe benefit and not wage or salary compensation, therefore, payroll taxes do not apply. Giving an employee $105 in transit/vanpool benefits is 

thus less expensive for an employer than raising the employee’s salary by $105. Allowing employees to 

reserve income on a pre-tax basis also saves the employer payroll taxes. 

X Employees receive more from tax-free transportation fringe benefits than from a comparable salary 

increase since they do not pay federal income or payroll taxes on the value of the fringe benefit. 

Employees who reserve income on a pre-tax basis for a qualified transportation fringe benefit also save 

money since they do not pay federal income or payroll taxes on the income reserved. 

X Several states provide employers with tax credits for offering commuter benefit programs. 

X Providing transit/vanpool benefits is one of the primary benefits employers participating in Best 

Workplaces for CommutersSM can offer their employees. Employers must offer at least one of three primary benefits to their employees to be recognized as one of the Best Workplace for CommutersSM (the 

other two are parking cash out and telecommuting). Under this option, the employer agrees to provide at 

least $30 per month in transit/vanpool benefits for any employee whose actual commuting costs are $30 

or more. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Best Workplaces for CommutersSM 

The National Standard of Excellence for Commuter 

Benefits 

This document is one in a series of briefing papers designed 

to help employers participating in Best Workplaces for 

CommutersSM implement commuter benefits. 

The U.S. Environmental Protection Agency (EPA) and the 

U.S. Department of Transportation (DOT) have established 

a voluntary National Standard of Excellence for employer-provided commuter benefits. Commuter benefits help American 

workers get to and from work in ways that cut air and global 

warming pollution, improve public health, increase worker 

productivity, and reduce expenses and taxes for employers 

and employees. Employers that agree to meet the National 

Standard of Excellence are recognized as Best Workplaces for 

CommutersSM and agree to: 

X Centralize commute options information so that it is easy 

for employees to access and use 

X Promote the availability of commuter benefits to employees 

X Provide access to an emergency ride home (ERH) program 

X Provide one or more of the following primary commuter 

benefits: 

✓ Vanpool or transit benefits of at least $30 per month 

✓ Parking cash out of at least $30 per month 

✓ Telework program that reduces commute trips by 6 

percent 

✓ Other option proposed by employer and agreed to by 

EPA. These services must reduce the rate at which 

employees drive to work alone and be perceived by 

employees as a significant workplace benefit. Options 

may include things like vacation time for carpoolers 

and comprehensive shuttle services 

X Provide three or more of the following additional commuter benefits: 

✓ Active membership in a Transportation Management 

Association (TMA) or similar organization; participation in a regional air quality initiative 

✓ Membership in a local ozone awareness program 

✓ Ridesharing or carpool matching, either in-house or 

through a local or regional agency 

✓ Pre-tax transit or vanpool benefits 

✓ Parking cash out less than $30 per month or less than 

75 percent of the actual parking benefit 

✓ Shuttles from transit stations, either employer-provided or through a local agency 

✓ Parking at park-and-ride lots or vanpool staging areas 

✓ Preferred parking for carpools and vanpools 

✓ Employer-run vanpools or bus programs 

✓ Employer-assisted vanpools 

✓ Secured bicycle parking, showers, and lockers 

✓ Electric bicycle recharging stations 

✓ Employee commuting awards programs 

✓ Discounts/coupons for bicycles and walking shoes 

✓ Compressed work schedules 

✓ Teleworking 

✓ Lunchtime shuttle 

✓ Proximate commute (working closer to home) 

✓ Incentives to encourage employees to live closer to work 

✓ On-site amenities (dry cleaning, etc.) 

✓ Concierge services 

✓ Participation/membership in a carsharing program 

✓ Other options proposed by employer 

X In addition, employers commit to ensuring that within 18 

months of applying at least 14 percent of their employees 

are not driving alone to work. 

Disclaimer 

SM . 

EPA provides this briefing as a service to employers participating in the Best Workplaces for Commuters

Information about private service providers is intended for 

informational purposes and does not imply endorsement by 

EPA or the federal government. 

The information presented here does not constitute official 

tax guidance or a ruling by the U.S. government. Taxpayers 

are urged to consult with the Internal Revenue Service of 

the U.S. Department of Treasury or a tax professional for 

specific guidance related to the federal tax law. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Table of Contents 

Commuter Tax Benefits: 

A Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4


Types of Qualified Transportation Fringe Benefits (Commuter Benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4


Three Ways to Provide Tax-Free Qualified Commuter Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5


Tax Savings for Employers and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5


Tax Benefits of Employer-Paid Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6


Tax Benefits of Employee Pre-Tax Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6


Employer/Employee Cost Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7


Sample Tax Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7


Employee Pays with Pre-Tax Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Employer Pays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Shared Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

State Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

State Tax Credits for Employer-Provided Transit/Vanpool Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Sample Calculation of Tax Savings with a State Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Employer Questions and Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Are all employees eligible for qualified commuter benefits? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

If I implement a transit/vanpool benefit program, am I required to offer the full value of the benefits to my employee


(e.g., $105 for transit/vanpool programs and $200 for qualified parking)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

If a monthly transit pass costs $125 per month, am I limited to providing a $105 benefit per month? . . . . . . . . . . . . . . . . . .11

How are benefits treated if an employee terminates employment and the transit pass covers multiple months? . . . . . . . . . . . .11

Under what circumstances can an employer offer benefits in the form of cash payments rather than using transit vouchers or


passes? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

What are the typical internal administrative and other costs faced by employers who implement commuter benefit 


programs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Does a qualified commuter benefits plan have to be in writing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

What are the payroll tax requirements for qualified commuter benefits? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Information and Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Appendix A: Internal Revenue Code Section 132(F) . . . . . . . . . . . . . . . . . . . . . . .14

Appendix B: Employer Tax Savings Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Option 1: Tax-Free Commuter Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Option 2: Pre-Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Option 3: Cost Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Appendix C: Brief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Commuter Tax Benefits: 

A Summary 

The Federal tax code allows employers to provide tax-free 

transit, vanpool, and parking benefits to their employees. 

Called “qualified transportation fringe” benefits, these commuter benefits can be deducted from corporate gross income 

for purposes of taxation when paid for by an employer. The 

employer and employee save on taxes since neither pays federal income or payroll taxes on these benefits. 

The scope of tax-free commuter benefits was expanded greatly in 1998 with passage of the Transportation Equity Act for 

the 21st Century (TEA-21). This act amended Section 

132(f ) of the Internal Revenue Code as it relates to employer-provided commuter benefits. Under the revised tax code, 

qualified transportation fringe benefits may be offered by 

employers in three ways: 

X The employer can cover the full cost of the qualified transportation fringe benefit 

X The employer can allow employees to reserve income on a 

pre-tax basis to cover the costs of a qualified transportation 

fringe benefit 

X The employer and employee can share the costs of the 

benefit. Under current law, transit and vanpool expenses 

up to $105 per month ($1,260 per year) and qualified 

parking expenses up to $200 per month ($2,400 per year) 

are tax-free 

These tax-free qualified transportation fringe benefits are 

often referred to as “commuter benefit” programs. Please 

note that for the purposes of this brief, we refer to “qualified 

transportation fringe benefits” as “qualified commuter benefits”. Through these programs, employers and employees can 

receive substantial tax savings in their payroll and federal 

income taxes. Also, some states, including Maryland, 

Georgia, and Minnesota, provide state tax credits for employers that implement commuter benefit programs. 

Types of Qualified Commuter Benefits 

According to the Internal Revenue Code Section 132(f ) 

qualified commuter benefits are excludable from income for 

purposes of taxation. Qualified commuter benefits include: 

Transit Passes 

Transit passes include any vouchers, passes, farecards, tokens, 

or related items that employees can use to pay for transportation on mass transit facilities or transportation provided by a 

person in the business of transporting persons for compensation or hire if such transportation has a seating capacity of at 

least six adults (not including the driver). 

Transportation in a Commuter Highway Vehicle 

Better known as a vanpool, the tax code defines a “commuter 

highway vehicle” as a vehicle that has a seating capacity of 

at least six adults, not including the driver; at least 80 percent of the vehicle’s mileage results from trips between work 

and employees’ homes; and during these trips, at least one 

half of the vehicle’s capacity must be filled (not including the 

driver). 

Qualified Parking 

The term “qualified parking” is defined as parking near or 

at the employers’ place of business or parking located near or 

at a place where employees commute to work by mass transit, commuter highway vehicles, or carpools (for example, 

parking at a transit station, park-and-ride lot, or vanpool 

staging area). 

Qualified commuter benefits include cash reimbursement by 

an employer to an employee for any of the three benefits 

described above. However, cash reimbursement is allowed for 

transit/vanpool benefits only in certain circumstances—when 

the transaction fees associated with purchasing vouchers are 

greater than one percent of the vouchers’ face value 

(described further below). 

Tax-Free Limits and Adjustments 

Under current tax law, transit and vanpool expenses up to 

$105 per month ($1,260 per year) and qualified parking 

expenses up to $200 per month ($2,400 per year) are taxfree. For future years, annual inflation adjustments may be 

made on all three benefits. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Three Ways to Provide Tax-Free 

Qualified Commuter Benefits 

Qualified commuter benefits may be offered by employers in 

three ways: 

1) Company covers full cost of the benefit—Up to $105 

per month for transit and vanpool expenses and $200 per 

month for qualified parking expenses is offered tax-free to 

employees and does not incur payroll taxes for the 

employer or employee. 

2) Company offers a “pre-tax” benefit—Employees may 

have up to $105 per month taken out of their current 

monthly pay towards the cost of commuting on transit or 

in vanpools, and up to $200 per month taken out for qualified parking expenses, before taxes are applied. Employees 

save federal income and payroll taxes. Many employers prefer this option because the employee pays the cost, and the 

employer saves money because FICA, Federal Insurance 

Contributions Act payments to Social Security and 

Medicare, and unemployment taxes do not apply. 

3) Employer and employee share costs—Under this 

option, the employer and employee each pay a share. The 

employer, for example, might offer $40 per month in transit/vanpool benefits and allow the employee to reserve up 

to $65 per month as a pre-tax benefit. The employer could 

also offer subsidized parking, paying $40 per month for a 

$105 space, and allowing the employee to pay for the 

other $65 through a pre-tax salary deduction. 

Tax Savings for

Employers and

Employees 

By offering tax-free qualified fringe benefits, both employers 

and employees can save taxes. 

The tax savings depends on the way the benefits are provided 

to employees—employer-paid, paid by employees through a 

pre-tax salary deduction, or a combination of both. This section describes how employers and employees save under each 

of these options. Sample calculations of tax savings follow in 

the Sample Tax Savings section. 

Option Employer Tax Benefit Employee Tax Benefit 

Employer-Paid: Employers provide Compared to providing a salary increase, Employee receives up to $105/month 

their employees with up to the employer saves on payroll taxes. No tax-free to commute via transit or vanpools 

$105/month to commute via transit payroll taxes are paid on the value of the (and/or $200/month tax-free for qualified 

or vanpools (typically in the form benefit. parking). The employee does not pay any 

of passes or vouchers) and/or up to taxes on the value of the benefit. 

$200/month in qualified parking. 

Employee Pre-Tax Deduction: Employer saves on payroll taxes (7.65% Employee saves on income tax and payroll 

Employers allow employees to reserve savings if the employee’s salary is below taxes. The amount of the benefit is no 

up to $105/month in pretax income the FICA wage base). No payroll taxes are longer treated as taxable salary. 

to pay for transit or vanpools and/or paid on the income that is reserved by 

up to $200/month to pay for parking. the employee. 

Employee, Employer Share Costs: Employer saves on payroll taxes (7.65% Employee does not have to pay any taxes on 

Employers pay transit, vanpool, or savings if the employee’s salary is below the portion of the benefit provided by the 

qualified parking costs up to a certain the FICA wage base) on the portion of employer. Additionally, the employee saves 

limit and the employee pays for the the subsidy paid by the employee through on income tax and payroll taxes by taking a 

remainder of the costs through a a pre-tax deduction, and on the value of pre-tax deduction to pay for the remainder 

pre-tax deduction. Total employer the benefit provided to the employee of his/her commuting costs. 

and employee paid costs cannot compared to providing a salary increase. 

exceed the monthly limits of $105/ 

month for transit and vanpool and 

$200 for qualified parking. 

The employer can also deduct the cost of the benefit as a business expense for purposes of calculating corporate income taxes, in the same manner that salary 

payments to employees can be deducted. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Tax Benefits of Employer-Paid Benefits 

If the employer pays for the benefit, the value of the 

benefit is: 

X Tax-free to the employee, and 

X Free of employer payroll (FICA) taxes 

As a result, employer-paid transportation benefits are cheaper 

to provide than an increase in taxable salary. 

For example, as shown in Figure 2, by providing a $105 per 

month ($1,260 per year) transit/vanpool benefit rather than 

an increase in salary to an employee with an annual salary 

less than the FICA wage base, the employer saves $96.39 per 

year in payroll taxes ($1,260 times 7.65 percent FICA). 

Meanwhile, the employee saves about $487 in taxes compared to receiving taxable income (based on a 25 percent federal income tax, 6 percent state income tax, and 7.65 percent 

FICA). With taxable salary, the employee does not see more 

than 38 percent of the salary increase. In contrast, the 

employee receives the full $1,260 per year ($105 per month) 

in transit/vanpool benefits paid by the employer. 

Both the commuter benefit and the salary increase may be 

deducted by the employer as a business expense for purposes 

of calculating corporate income taxes. 

Note that some transit-voucher providers charge an administrative fee for ordering the vouchers, which would slightly 

increase the cost to the employer. On the other hand, some 

transit agencies offer discounts for purchasing transit passes 

in bulk, which would lower the cost. Some states and localities also offer employer tax credits, further lowering the cost 

to the employer. The employee takes home the full $1,260 

benefit, tax-free. To net an increase in after-tax income of 

$1,260 would require a salary increase of over $2,050.1 

Under Federal tax law, an employee who pays to park at a 

qualified parking area (such as a transit station) and then 

takes mass transit or a commuter highway vehicle to work 

can receive a combination of transit/vanpool and qualified 

parking benefits, up to a combined benefit of $305 per 

month ($105 for the transit/vanpool benefit and $200 per 

month for parking) or a maximum of $3,660 per year. 

Tax Benefits of Employee Pre-Tax Deductions 

If the employer does not pay for the fringe benefit, but 

deducts the pass and/or parking cost from an employee’s pretax income: 

$500 

$400 

$300 

$200 

$100 

$0 

Employer Savings Employee Savings 

State Income Taxes 

Federal Income Taxes 

Payroll Taxes 

Figure 2: Tax Savings from offering $1,260 commuter 

benefit rather than salary (to an employee with an annual salary less than the FICA wage base) 

X the employer sees a reduction in payroll taxes, and 

X the employee does not pay federal income, payroll, and 

possibly state income taxes on the deducted amount 

Employers do not pay any payroll (FICA) taxes on the 

amount of income that is reserved by the employee from taxable income. FICA consists of Social Security and Medicare 

taxes paid on wages. For tax year 2004, employers and 

employees pay equal amounts: 6.2 percent of wages up to 

$87,900 per year per employee for Social Security and 1.45 

percent of all wages for Medicare (no salary limit). As a 

result, for every dollar that an employee reserves for a pre-tax 

transportation fringe benefit, the employer saves about $7.65 

(for employees making less than $87,900 per year).2 An 

employee who reserves $105 per month for transit or vanpools will save over $96 per year for the employer in reduced 

FICA taxes. If an employee reserves the full $200 per month 

for qualified parking, employer tax savings would be $183.60 

per year. 

Employees also receive substantial tax savings. An employee 

in the 25 percent federal tax bracket who reduces his or her 

pre-tax income by $105 per month to pay for transit or vanpooling expenses could save $315 per year in federal income 

1 Some transit systems add value when fares are purchased in larger increments, resulting in a larger employee benefit. 

2 Because Social Security taxes do not apply on income above $87,900 per year (in 2004), employer and employee tax savings from commuter benefit programs 

would be less for an employer with many higher paid employees than one with more lower paid employees. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

taxes and an additional $96.39 in payroll taxes. Employees 

could also save on state income taxes that piggyback on the federal tax definitions of compensations. For example, in a state 

with a 6 percent income tax, employees could save another 

$75.60 in taxes. In total, an employee could be saving over 

$487 each year. This brings the real transit cost to the employee 

down from $105 per month to $64.41 per month, a savings of 

more than 35 percent. 

Employer/Employee Cost Sharing 

Both employers and employees benefit when an employer 

shares the cost of commuting with employees by paying a 

portion of commute expenses as an additional benefit and 

allowing employees to deduct the rest of their expenses (up 

to the monthly limit) from their pre-tax income. For example, if an employer decides to provide up to $30 per month 

($360 per year) for transit and allows the employee to take 

the additional $75 ($900 per year) from pre-tax income, the 

employer would save $68.85 in payroll taxes on the $900 in 

pre-tax income. The employer also would save $27.54 in 

payroll taxes compared to offering the $30 as salary, for a 

combined savings of $91.80 per year per participating 

employee. Regardless of whether the employer provides 

$1,260 to the employee as a qualified commuter benefit or as 

additional salary, the employer saves on corporate income 

taxes as both are tax deductible. 

Employee tax savings are also substantial under this 

approach. By taking $360 per year as a tax-free commuter 

benefit, rather than as a salary increase, the employee takes 

home an additional $139.14 (assuming a 25 percent Federal 

income tax rate, a 6 percent state income tax rate, and a 7.65 

percent rate for FICA). Also, by paying for the remainder of 

transit expenses ($900 per year) with pre-tax income, an 

employee can save up to $347.85 in taxes (once again assuming a 25 percent Federal income tax rate, a 6 percent state 

income tax rate, and a 7.65 percent rate for FICA taxes), for 

a combined savings of $486.99 per year. 

As a salary substitute, an additional benefit, or a combination 

of the two, transportation benefits provide more value for less 

money than cash. For more examples, see the following section. 

Sample Tax Savings 

This section contains sample calculations for tax savings associated with different types of commuter benefit programs. 

For all examples, it is assumed that the employee is single 

with no dependants, pays at a federal income tax rate of 25 

percent, and makes less than the taxable wage base. 

Corporate income taxes are assumed to be 34 percent. 

Example 1: Employee Pays with Pre-Tax Income3 

Craig is an employee at Acme Corporation, making $3,600 

per month. Acme Corporation offers its employees commuter benefits, including allowing employees to pay for transit and vanpool passes using pre-tax income, up to the 

monthly limit of $105. Craig elects to do this and uses pretax income to purchase his monthly transit pass, which costs 

$90 per month. By electing to use pre-tax income to pay for 

his transit pass, $90 is taken out of Craig’s monthly, pre-tax 

income, thereby saving him the FICA and federal income 

taxes that would normally be applied to that $90 had he purchased his tickets using the money from his paycheck. 

Both Craig and Acme pay less in taxes with the pre-tax deduction option. The transit pass costs Craig one-third less ($90 

minus $29.39, or $60.61) than if he had paid for it through 

taxable income, with a net tax savings to the employer. 

Employer (per Employee) Employee 

Pre-Tax Regular Pre-Tax Regular 

Income Salary Income Salary 

Direct Cost $0 $0 Direct Cost $90 $90 

FICA Cost — $6.89 FICA Cost — $6.89 

Corporate Income Tax — — Income Tax — $22.50 

Savings per Month $6.89 — Savings per Month $29.39 — 

Savings per Year $82.62 — Savings per Year $352.62 — 

3 This example was modified from an example given in a publication entitled “Tax Laws and Commute Related Expenses,” which was developed by Charlene 

Fleming, MPAcc, President, K.E. & Associates, Seattle, Washington, in November 1999 for King County Metro. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Example 2: Employer Pays 

Acme Corporation has decided to provide employees with a 

tax-free transit/vanpool voucher of up to $90 per month 

($1,080 per year) to help pay commute expenses. Craig elects 

to accept an employer-paid monthly transit pass worth $90 

per month. Over the course of a year, he will receive $1,080 

worth of transit passes. For both Craig and Acme 

Corporation, this arrangement is better than giving him a 

$1,080 raise since Craig actually receives more money and 

Acme pays less. If Acme Corporation had raised Craig’s 

annual salary by $1,080, he would only receive $727.38 in 

post-tax income. Because transit benefits are tax-free, he 

receives the full $1,080 benefit. The transit pass is free to 

Craig, providing him with a no-cost commute. In total, 

Craig saves about $352.62 in taxes when his employer provides him with a tax-free transit benefit rather than the same 

benefit in salary. 

Employer (per Employee) Employee 

Pre-Tax Regular Pre-Tax Regular 

Income Salary Income Salary 

Direct Cost $90.00 $90.00 Direct Cost $90.00 $90.00 

FICA Cost — $6.89 FICA Cost — $6.89 

Corporate Income Tax ($30.60) ($30.60) Income Tax — — 

Net Cost $59.40 $66.29 Net Benefit $90.00 $60.62 

Savings per Month $6.89 — Savings per Month $29.39 — 

Savings per Year $82.62 — Savings per Year $352.62 — 

Note: Craig’s take home pay through a salary increase would be even lower if he was subject to state and/or local income taxes, since this calculation does not 

include state or local income taxes. 

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Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Example 3: Shared Costs 

Acme Corporation has decided to provide a tax-free fringe that he will take the $65 tax-free fringe benefit and then use 

benefit of $65 per month. Employees whose commute pre-tax income to pay for the remaining $25 of his transit 

expenses exceed this will be allowed to pay the remainder of pass expenses. 

their expenses using pre-tax income. For Craig, this means 

Impact on Employer (per Employee) Impact on Employee for Employer’s 

for Employer’s Contributions Contributions 

Transit Salary Transit Salary 

Benefit Increase Benefit Increase 

Direct Cost $65.00 $65.00 Direct Cost $65.00 $65.00 

FICA Cost — $4.97 FICA Cost — $4.97 

Corporate Income Tax ($22.10) ($22.10) Income Tax — $16.25 

Net Cost $42.90 $47.87 Net Benefit $65.00 $43.78 

Savings per Month $4.97 — Savings per Month $21.22 — 

Savings per Year $59.67 — Savings per Year $254.67 — 

Impact on Employer (per Employee) Impact on Employee for Employee’s 

for Employee’s Contributions Contributions 

Transit Benefit Transit Benefit 

Direct Cost $0 Direct Cost $25.00 

FICA Cost $1.91 FICA Cost $1.91 

Corporate Income Tax — Income Tax $6.25 

Savings per Month $1.91 Savings per Month $8.16 

Savings per Year $22.92 Savings per Year $97.95 

Total Impact Total Impact 

Total Monthly Cost $40.99 Total Monthly Cost $16.84 

Total Annual Cost $1.91 Total Annual Cost $1.91 

Acme’s total cost per month for the benefit is $40.99, which result, the company pays $491.85 per year. As shown above, 

consists of $42.90 net cost for the $65 benefit and $1.91 Craig only pays $16.84 per month for the transit benefit 

FICA savings from the employee's pre-tax income. As a with a $90 value. 

9 
Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

State Tax Credits 

State Tax Credits for Employer-Provided 

Transit/Vanpool Benefits 

A number of states have implemented tax incentive programs 

to encourage employers to provide transit/vanpool benefits to 

their employees. These programs increase the cost savings for 

businesses: 

Maryland—The Maryland Commuter Tax Credit provides a 

50 percent tax credit, up to $30 per employee per month, for 

provision of transit passes, vanpool benefits, and reimbursement for carpooling expenses. Employers can elect to which 

tax they wish to apply the credit, such as the state income 

tax, the financial institution franchise tax, or the insurance 

premium tax. The tax credit essentially subsidizes the implementation of commuter benefits, although it is broader 

because the tax credits can also be used to offset monthly, 

employee carpooling costs. Under Federal law, any carpool 

expense reimbursements are taxable, as they are not considered qualified transportation fringes under Section 132 (f ) of 

the Internal Revenue Code. The Maryland Commuter 

Benefits Act of 2000 allows a credit against specified state 

taxes for employers who provide employees a parking cash 

out or an emergency ride home program. It also allows specified tax-exempt organizations to apply tax credits allowed for 

employer-provided commuter benefits as a credit against the 

payment of employee withholding taxes and required to be 

paid to the Comptroller. Finally, the Act also established 

reporting requirements to help assess the success of the program. 

Georgia—Employers providing employees with designated 

commuter benefits, including transit passes, transportation in 

a commuter highway vehicle, and qualified parking, are eligible to receive an annual $25 tax credit for each employee 

receiving a commuter benefit. The credit cannot exceed the 

expense to the employer in providing the benefit and the 

alternative method of transportation must be used at least 10 

days per month. 

Minnesota—In Minnesota, tax credits can be received by 

employers who provide employees with transit passes (for use 

in Minnesota only) for transportation via either a public or 

privately owned mass transit facility or by a person in the 

business of transporting people for compensation or hire. 

Vehicles hired to transport employees must seat at least six 

people (not including the driver). The credit is equal to 30 

percent of the difference between what the employer pays for 

the passes and what employees are charged for the passes. The 

credit is nonrefundable and can only be used in the current 

tax year. The types of organizations eligible for the tax credit 

include C corporations, S corporations, sole proprietors, 

insurance companies, fiduciaries, and nonprofit organizations. 

Delaware—Employers with approved Travelink plans/programs can receive either a 10 percent tax credit based on the 

direct cost of developing, implementing, and maintaining a 

program, a credit based on the ratio of commuter trip reductions versus commuter trips generated, or a credit of $250 

per commute trip reduced (whichever results in the smaller 

amount). 

Connecticut—Employers in Connecticut with 100 or more 

employees are eligible for a tax credit for any taxable year 

after January 1, 1997 equal to 50 percent of the employer's 

direct costs for implementing a traffic reduction program, up 

to a limit of $250 per participating employee. Eligible programs must have been implemented after January 1, 1995. 

The total amount of credits available each year to corporations under this program is $1.5 million. 

Oregon—Under the Oregon Business Energy Tax Credit 

Program, employers can receive a tax credit equal to 35 percent of project costs for projects involving commute reduction, investments in cleaner-fuel vehicles; participation in 

various conservation and renewable energy projects and recycled materials markets; and involvement in the research and 

development of new, energy-efficient technologies. Eligible 

commute reduction programs must decrease work-related 

travel and eligible costs include those from telework programs, providing transit passes, commuter pool vehicle 

arrangements, financial incentive programs, bicycle projects, 

and transportation management association membership 

dues. The credit is taken over five years, with 10 percent 

taken the first and second year and 5 percent taken in each 

subsequent year. 

New Jersey—The Smart Moves for Business Tax Credit 

Program provides a tax credit to eligible corporations equal 

to either 10 percent of the costs attributed to implementing 

an authorized commuter transportation benefits plan/report 

or up to $124 per participating employee. For partnerships 

or limited liability corporations, the program provides a tax 

credit of either 157 percent of the costs attributed to implementing an authorized commuter transportation benefits 

plan/report or up to $1,947 per participating employee. For 

each type of employer, the tax credit is taken for the smaller 

amount of the two calculations and the employer decides to 

10

Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

which tax the credit applies. 

Sample Calculation of Tax Savings with 

a State Tax Credit4 

The following calculations illustrate the savings of an 

employer in Maryland who provides its employees with up to 

$60 per month for transit passes. State tax credits may reduce 

the amount of federal tax savings, due to smaller federal 

deductions for state taxes. 

Monthly Cost of Transit Pass 

(per participating employee) $60.00 

Maryland State Tax Credit 

(50 percent of transit pass cost) ($30.00) 

Total Business Expense $30.00 

Federal Corporate Income Tax Savings 

(at 34 percent of $30 Business Expense) ($10.20) 

Monthly Cost of Transit Pass to Employer $19.80 

Employers should discuss state tax credit implications with a 

qualified tax advisor. 

State Tax Credits for Employer Commute Programs 

Several states have implemented other types of tax incentives 

to encourage employers to adopt programs to encourage 

employees to commute to work without using a single occupancy vehicle. Many of these programs were passed prior to 

the passage of TEA-21 and address a broad range of transportation alternatives. 

Employer Questions

and Answers5 

Are all employees eligible for qualified commuter 

benefits? 

Yes. Any employee or group of employees can be offered a 

qualified commuter benefit. The employer has the discretion 

to choose which employees are offered the benefit and the 

amount of the benefit can vary from employee to employee. 

There are only two restrictions on who can receive the qualified commuter benefits. First, it must be given only to 

employees who will use it for their daily commute to and 

from work, and not for personal travel. Second, individuals 

who are employed as partners in a company, who are selfemployed, or who are more than two percent shareholders of 

a subchapter S corporation are not eligible. 

If I implement a transit/vanpool benefit program, am 

I required to offer the full value of the benefits to my 

employee (e.g., $105 for transit/vanpool programs 

and $200 for qualified parking)? 

No. An employer may provide benefits of any amount, or 

provide no assistance, in the purchase of vouchers. 

If a monthly transit pass costs $125 per month, am I 

limited to providing a $105 benefit per month? 

No. An employer may provide transit/vanpool benefits of 

any amount. The tax-free benefit for transit/vanpool benefits, 

however, is currently limited to $105 per month. As a result, 

the employee and employer must pay taxes on the value of 

the benefit that exceeds the $105 statutory limit. For example, if the employer provides the employee with a monthly 

pass valued at $125 per month, $105 is a tax-free fringe benefit, and the excess—$20—must be included in the employee’s wages for income and employment tax purposes. 

Similarly, if the employer offers a pre-tax salary deduction 

option, the employee may be allowed to purchase a pass with 

a value of more than $105 per month. Then, $105 per 

month will be deducted from the employee’s wages for 

income and employment tax purposes. The remaining cost 

will be included in taxable salary but be used by the employer to purchase the pass. 

How are benefits treated if an employee terminates 

employment and the transit pass covers multiple 

months? 

In general, the value of transit passes provided in advance to 

an employee for a month in which the individual is not an 

employee must be included in the employee’s wages for 

income tax purposes. Transit passes distributed in advance to 

an employee are excludable from wages for income and 

employment tax withholding purposes if the employer distributes transit passes to the employee in advance for not 

more than 3 months. At the time the passes are distributed, 

there cannot be an established date that the employee’s 

employment will terminate (for example, if the employee has 

given notice of retirement) occurring before the beginning of 

the last month of the period for which the transit passes are 

provided. Assume the employer distributes transit passes 

quarterly, and the employee elects to have $315 deducted 

from salary to cover transit vouchers for April, May, and 

June. If employment terminates on May 31, and there was 

4 This example is based on an example and information found in a brochure by the Maryland Department of Transportation and Maryland Department of the 

Environment called “Maryland’sNew Commuter Tax Credit.” 

5 Questions and answers were based on information found at the following Web sites: www.bwc.gov, www.fta.dot.gov/library/policy/tvbp.html, and 

tmi.cob.fsu.edu/act/f_tool.htm 

11

Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

not an established date of termination at the time the transit 

passes were distributed, then the value of the transit passes 

provided for June ($105) is excludable from the employee's 

wages for employment tax purposes. 

However, the value of the transit passes distributed for June 

($105) is not excludable from wages for income tax purposes. 

If the employee’s termination date was established at the time 

the transit passes were provided, then the $105 is included in 

the employees wages for both income and employment tax 

purposes. 

Under what circumstances can an employer offer 

benefits in the form of cash payments rather than 

using transit vouchers or passes? 

The tax code states that transportation reimbursements must 

be made through transit vouchers or passes, rather than cash 

payments, unless the employer can show that the voucher 

provider charges a fee in excess of one percent of the average 

annual value of the voucher. Internal administrative costs 

that cannot be considered in determining voucher availability 

include expenses incurred by the employer to distribute the 

vouchers (i.e., if the employer chooses to mail vouchers to 

employees, the postal fee cannot be considered); any additional security measures that must be taken to safeguard the 

vouchers; expenses incurred to advertise the provision of 

transit vouchers; etc. 

Example: Acme Corporation would like to provide a transit 

benefit up to $105 per month to all employees who commute to work via subway. The local transportation management association (TMA) charges a 0.5 percent fee for providing passes to employers. Because Acme does not have a central location where passes can be picked up, it will have to 

distribute the passes by sending them to employees via regular mail on a monthly basis. This will cost the company 

approximately $1,000 per year in postal fees in addition to 

the cost of having a Human Resources employee prepare the 

envelopes, bring them to the post office, etc. To save money, 

Acme would prefer to provide cash reimbursements to 

employees rather than distribute the passes each month. Due 

to the requirements of the federal regulations, Acme is not 

allowed to do this. The only cost that Acme can take into 

consideration when deciding how to distribute the passes is 

how much the TMA charges for the vouchers. In this case, 

the TMA charges less than one percent and therefore, Acme 

must purchase the vouchers instead of providing a cash payment. The personnel costs and costs of distributing the passes via mail cannot be considered because they are internal 

administrative costs. 

What are the typical internal administrative (and 

other) costs faced by employers who implement 

commuter benefit programs? 

The most common internal administrative costs faced by 

employers who implement commuter benefit programs 

include the cost of managing the program on a day-to-day 

basis, marketing the program to employees, distributing transit passes or vouchers, etc. Other internal costs depend on 

the type of program that the employer chooses to establish. 

For example, if an employer sets up a vanpool program, then 

typical costs could include the amount of money spent on 

purchasing or leasing a commuter highway vehicle, finding 

and/or training someone to drive the vehicle, and any additional insurance expenses. 

Does a qualified commuter benefits plan have to be 

in writing? 

No. The Internal Revenue Code does not require that a commuter benefits plan be in writing or that any form of written 

plan be submitted to the IRS. However, a company may 

wish to have certain written rules in order to answer employee questions and describe how the commuter benefit program operates. For example, an employer could write a plan 

that describes: 

X Which employees are eligible to receive commuter benefits 

X What benefits will be provided by the company 

X How the company vanpool and emergency ride home programs operate, and 

X The procedure for enrolling in and discontinuing participation in the benefits program 

The company should not submit this plan to the IRS, but 

should make it available to all employees. 

What are the payroll tax requirements for qualified 

commuter benefits? 

Qualified commuter benefits that do not exceed the statutory 

monthly limit are not considered wages for purposes of 

FICA, the Federal Unemployment Tax Act (FUTA), and federal income tax withholding. Any amount by which an 

employee elects to reduce compensation under the limit is 

not subject to the FICA, the FUTA, and federal income tax 

withholding. Qualified commuter benefits exceeding the 

applicable statutory monthly limit are wages for purposes of 

the FICA, the FUTA, and federal income tax withholding 

and are reported on the employee’s Form W-2, Wage and Tax 

Statement. Also, cash reimbursements to employees (for 

example, cash reimbursement for qualified parking) in excess 

12

Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

of the applicable statutory monthly limit are treated as paid 

for employment tax purposes when actually or constructively 

paid. Employers must report and deposit the amounts withheld in addition to reporting and depositing other employment taxes. To receive payroll tax savings, employees do not 

have any additional paperwork requirements beyond those 

normally performed when filing taxes. 

Information and 

Contacts 

The Internal Revenue Code that governs employer provided 

commuter benefits is found at 26 USC Section 132(f ), and 

is available on the Web at <uscode.house.gov/usc.htm> or 

<tmi.cob.fsu.edu/act/f_benefit.htm>. 

For more information relating to qualified transportation 

fringes in Section 132(f ), visit the Internal Revenue Service 

(IRS) Web site at <www.irs.gov>. 

This site contains useful information for employers regarding 

the tax treatment of fringe benefits. Some publications available from the IRS that may be useful include: 

X Publication 15a, Employer’s Supplemental Tax Guide— 

Section 6. Employee Fringe Benefits <www.irs.gov/pub/irspdf/p15b.pdf>. 

X Publication 15b, Employer’s Tax Guide to Fringe Benefits— 

Transportation (Commuting) Benefits 

<www.irs.gov/pub/irs-pdf/p15b.pdf>. 

X Final Regulation Concerning Qualified Transportation 

Fringe Benefits (Issued January 11, 2001) 

<frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname= 

2001_register&docid=01-294-filed>. 

For more information relating to qualified commuter benefits in Section 132(f ), send a written request to: 

Freedom of Information Reading Room 

PO Box 795 

Ben Franklin Station 

Washington DC, 20044b 

Or contact Patricia Holtzworth at the IRS at 202-622-6040. 

13 
Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Appendix A:

Internal Revenue 

Code Section 132(F) 

(f ) Qualified transportation fringe 

(1) In general 

For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an 

employer to an employee: 

(A) Transportation in a commuter highway vehicle if such 

transportation is in connection with travel between the 

employee’s residence and place of employment. 

(B) Any transit pass.

(C) Qualified parking. 

(2) Limitation on exclusion 

The amount of the fringe benefits which are provided by an 

employer to any employee and which may be excluded from 

gross income under subsection 

(a)(5) shall not exceed— 

(A) $105 per month in the case of the aggregate of the benefits described in subparagraphs (A) and 

(B) of paragraph (1), and

(B) $200 per month in the case of qualified parking. 

(3) Cash reimbursements 

For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an 

employer to an employee for a benefit described in paragraph 

(1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item 

which may be exchanged only for a transit pass is not readily 

available for direct distribution by the employer to the 

employee. 

(4) No constructive receipt 

No amount shall be included in the gross income of an 

employee solely because the employee may choose between 

any qualified transportation fringe and compensation which 

would otherwise be includible in gross income of such 

employee. 

(5) Definitions 

For purposes of this subsection— 

(A) Transit pass. The term “transit pass” means any pass, 

token, farecard, voucher, or similar item entitling a person to 

transportation (or transportation at a reduced price) if such 

transportation is— 

(i) on mass transit facilities (whether or not publicly owned), 

or 

(ii) provided by any person in the business of transporting 

persons for compensation or hire if such transportation is 

provided in a vehicle meeting the requirements of subparagraph (B)(i). 

(B) Commuter highway vehicle. The term “commuter highway vehicle” means any highway vehicle— 

(i) the seating capacity of which is at least 6 adults (not

including the driver), and 

(ii) at least 80 percent of the mileage use of which can reasonably be expected to be— 

(I) for purposes of transporting employees in connection 

with travel between their residences and their place of 

employment, and 

(II) on trips during which the number of employees transported for such purposes is at least 1/2 of the adult seating capacity of such vehicle (not including the driver). 

(C) Qualified parking. The term “qualified parking” means 

parking provided to an employee on or near the business 

premises of the employer or on or near a location from 

which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include 

any parking on or near property used by the employee 

for residential purposes. 

(D) Transportation provided by employer. Transportation 

referred to in paragraph (1)(A) shall be considered to be 

provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or 

for the employer. 

(E) Employee. For purposes of this subsection, the term 

“employee” does not include an individual who is an 

employee within the meaning of section 401(c)(1). 

(6) Inflation adjustment 

(A) In general 

In the case of any taxable year beginning in a calendar year 

after 1999, the dollar amounts contained in subparagraphs 

(A) and (B) of paragraph

14 
___________ 

___________ 

___________ 

___________ 

Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

(2) shall be increased by an amount equal to— 

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment determined under section 

1(f )(3) for the calendar year in which the taxable year 

begins, by substituting “calendar year 1998” for “calendar 

year 1992”. 

(B) Rounding 

If any increase determined under subparagraph 

(A) is not a multiple of $5, such increase shall be rounded to 

the next lowest multiple of $5. 

(7) Coordination with other provisions 

For purposes of this section, the terms “working condition 

fringe” and “de minimus fringe” shall not include any qualified transportation fringe (determined without regard to 

paragraph (2)). 

Source: IRS Tax Code (www.irs.gov). 

Appendix B: Employer Tax Savings Worksheet 

The following calculations can be used to estimate an employer’s tax savings from implementing a commuter benefit program. 

Option 1: Tax-Free Transportation Fringe Benefit 

This section calculates the tax savings for employers who offer commuter benefits as an employer-paid, transportation fringe 

benefit, compared to providing the same benefit as additional salary. 

1. Yearly Cost of Benefit Per Employee 

(i.e., the maximum amount the employer provides up to statutory limit) 

2. FICA rate (for participants below FICA wage base) 0.0765 

3. FICA Tax Savings per Participating Employee (Line 1 x Line 2) 

4. Number of Participating Employees 

5. Total FICA Tax Savings (Line 3 x Line 4) 

Option 2: Pre-Tax Benefit 

This section is for employers who allow employees to use pre-tax income to pay for qualified commute expenses. 

1. Average amount of pre-tax income deducted from each participating employee (up to statutory limit) ___________ 

2. FICA rate (for participants below FICA wage base) 

3. Average FICA Tax Savings per Participating Employee (Line 1 x Line 2) ___________ 

4. Number of Participating Employees ___________ 

5. Total FICA Tax Savings (Line 3 x Line 4) ___________ 

Option 3: Cost Sharing 

Employers who share commute costs with participating employees can calculate their tax savings using the two options above. 

First, calculate the payroll tax savings from offering employees the tax-free benefit rather than a salary increase. Second, calculate payroll tax savings from allowing employees to use pre-tax income to pay for the benefit. 

15


0.0765 
Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

Appendix C:

Brief History 

Since the early 1990s, federal legislation and actions have 

enabled and expanded the range of commuter benefits that 

employers can offer their employees. This section briefly 

describes the evolution of the qualified transportation fringe 

benefit program. 

Pre-1992: Parking is Only Qualified Transportation 

Fringe Benefit. 

Prior to 1993, parking was the only transportation fringe 

benefit specifically excluded under the federal tax code. 

Transit passes were considered de minimus fringe benefits. A 

de minimus benefit is a service or item of such small value or 

provided so infrequently as to make accounting for it 

impractical or impossible. As a result, transit benefits were 

allowed to be offered tax-free to employees as long as they 

were of small value. The initial de minimus value was defined 

at $15 per month, which was later adjusted to $21 per 

month. Vanpool benefits were considered neither transportation fringe benefits nor de minimus benefits. 

1992: Energy Policy Act of 1992 Expands Qualified 

Transportation Fringe. 

In 1992, Congress passed the Energy Policy Act of 1992 

(Pub. L. No. 102-486). This Act was important in that it 

expanded the term qualified transportation fringe to include 

transit passes and transportation in commuter highway vehicles (i.e., vanpools) in addition to qualified parking. As a 

result, it allowed the employer, for the first time, to offer 

vanpool benefits tax-free. It also allowed transit passes to be 

provided to employees tax-free at a higher value than allowed 

for a de minimus fringe. The Act imposed a tax-free limit of 

$60 per month on transit/vanpool benefits and $155 per 

month for qualified parking. It provided an inflation adjustment to these limits based on changes in the consumer price 

index (CPI), with increases to rise in increments of $5. In 

order to receive tax-free status, all benefits were required to 

be offered in addition to, and not in lieu of, salary. The Act 

applied to benefits provided after December 31, 1992. 

1995: Tax-Free Limit on Transit/Vanpool Benefits 

Rises to $65 per Month. 

In accordance with the inflation adjustment provisions of the 

Energy Policy Act of 1992, the monthly tax-free limit for 

commuter highway vehicle and transit passes was raised from 

$60 to $65 for tax years beginning in 1996. 

1997: Taxpayer Relief Act of 1997. The Taxpayer Relief Act 

of 1997 (Pub. L. No. 105-34) amended the Federal tax code 

to allow qualified parking to be provided to employees in 

lieu of salary beginning December 31, 1997. As noted above, 

the tax code previously stated that transportation fringe benefits could not be taken in lieu of salary. As a result, prior to 

1998, the tax code created a major barrier for employers that 

wanted to offer their employees cash in lieu of parking (parking cash out): if they offered a choice of cash or parking, all 

employer-provided parking would become taxable. By allowing parking benefits to be taken in lieu of salary, the Taxpayer 

Relief Act of 1997 allowed employers to offer their employees 

the option of accepting taxable cash income in lieu of a parking space at work, while maintaining the tax-free status of the 

parking benefit. The employer would only have to pay taxes 

on the cash payment, not the parking benefit. 

1998: Transportation Equity Act for the 21st Century 

(TEA-21). The Transportation Equity 

Act for the 21st Century (Public Law 105-178), which was 

enacted on June 9, 1998, amended the Internal Revenue 

Code to allow any qualified transportation fringe to be provided in lieu of salary. Just as the Taxpayer Relief Act of 1997 

allowed qualified parking benefits to be taken in lieu of 

income, TEA-21 expanded this to also allow transit pass and 

commuter highway vehicle benefits to be taken in lieu of 

other monetary compensation. The Act also raised the tax-free 

limit on transit pass and commuter highway vehicle benefits 

from $65 to $100 per month, starting in 2002. (For 2005, the 

tax-free limit increased to $105 per month for transit/vanpool 

benefits and $200 per month for qualified parking.) 

1999: Commuter Choice Initiative launched. 

In 1999, the federal government started the Commuter 

Choice Initiative. As part of this, FTA released the 

Commuter Choice Toolkit and the U.S. Environmental 

Protection Agency, in collaboration with the U.S. 

Department of Transportation, initiated the Commuter 

Choice Leadership Program to honor employers providing 

commuting benefits to their employees. 

2001: Final Regulation: Qualified Transportation 

Fringe Benefits. 

On January 11, 2001, the Internal Revenue Service issued 

final regulations concerning qualified transportation fringe 

benefits and their excludability from employees’ gross 

income. The regulations provide rules to ensure that transportation benefits provided to employees are excludable from 

gross income. These regulations provide clarification regarding under what circumstances transportation fringes may be 

16

Commuter Tax Benefits: Implementing Commuter Benefits as One of the Nation’s Best Workplaces for CommutersSM 

provided pursuant to a compensation reduction agreement, 

the ability to carry over excess amounts to subsequent periods, reporting requirements, and use of cash payments rather 

than transit vouchers or passes. 

2002: Best Workplaces for CommutersSM unveiled. 

In 2002, the U.S. Environmental Protection Agency and the 

U.S. Department of Transportation unveiled the Best 

Workplaces for CommutersSM list, a list to honor and to recognize employers who offer their employees outstanding commuting benefits. Participating companies earn the designation 

“Best Workplaces for CommutersSM”—a mark of excellence 

for environmentally and employee-friendly organizations. The 

program builds on the efforts of many top employers to help 

get employees to work safely, on time, and free of commuterelated stress. It provides the tools, guidance, and promotion 

necessary to help U.S. employers of any size incorporate commuter benefits into their standard benefits plan, reap financial 

benefits, and gain national recognition. The list replaces and 

builds upon the work begun by the Commuter Choice 

Leadership Initiative to recognize employers who offer their 

employees outstanding commuting benefits. 

For More Information 

This guidance document and other information about 

Best Workplaces for CommutersSM are available at 

<www.bwc.gov> or by calling the Best Workplaces for 

CommutersSM information request line at 888 856-3131. 

Acknowledgements 

This document was originally prepared for EPA’s Office of 

Transportation and Air Quality under contract 68-W6-0029 

by ICF Consulting and updated by Eastern Research Group, 

Inc. under contract 2W-0693-NBLX. We would like to 

thank the various reviewers who provided comments and 

feedback on the document. 

17

EPA 420-S-01-003

Updated November 2005