From the Tax Adviser

Pretax parking, transit passes and commuter vans.

Transportation Fringe Benefits

  n general, when an employer provides a benefit for its employees, the employees must include the value of that benefit in their compensation; this is especially true when the employees have the option of receiving either the benefit or its cash equivalent. Congress has carved out a number of exemptions and exceptions in the tax code from this general rule of includability for many types and amounts of benefits. Such is the case for certain transportation benefits.

Employer-provided transportation benefits have been—and continue to be—very popular. Employers may give their employees a choice between receiving (taxable) cash or (tax-free) transportation benefits. Only when an employee chooses to receive the cash or when the value exceeds a specified dollar exemption limit is he or she required to include an amount in income.


Qualified transportation fringe benefits include the following:

  • Transportation in a commuter highway vehicle, defined as any vehicle seating at least six adult passengers in which 80% of the mileage is for travel between employees’ residences and the place of employment and when at least half the adult seating capacity is used for employees on such trips.
  • Transit passes, including any pass, token, farecard, voucher or similar item that entitles the employee to transportation on mass transit or in a vanpooling vehicle.
  • Parking provided to an employee on or near the employer’s business premises or on or near a location from which the employee commutes using commuter highway vehicles, transit passes or car pools.

Limits on the value of the transportation benefits allow employees to exclude certain amounts from income. For qualified parking, an employee need not report up to $175 per month from his or her gross income; for qualified employer-provided transit passes or vanpooling, the maximum exclusion is $65 per month. (Beginning in 2002, the base amount for transit passes and vanpooling will be increased to $100.) Thus, an employer may offer both parking and transit passes up to a maximum total benefit of $240 if employees drive from their homes to a central location (where they receive qualified parking) and then take mass transportation to the employer’s offices.

The employer must calculate, on a monthly basis, the value of the benefits provided to employees. If the fair market value of a benefit is more than the limit for any month for any employee, the excess must be included in that employee’s gross income and wages (unless the employee pays the difference). In addition, the “unused” portion of a monthly exemption amount, if any, may not be carried over to subsequent months.


A qualified transportation benefit plan may provide a tax-saving opportunity for both employers and employees.

Under such a plan, an employer allows its employees to purchase parking or transit passes on a pretax basis by reducing their salaries by the lesser of the value of the benefit or the applicable limit and then acting as the purchasing agent for the employees.

From a tax perspective, this arrangement may prove beneficial to both the employees and the employer. Because their compensation is reduced, the employees have to pay lower income and employment taxes. At the same time, the employer also may save payroll taxes on the benefits for the employees under the FICA wage base ($72,600 for 1999) and Medicare taxes for all employees. Such a program does not increase the employer’s costs (other than those for administration).

For a discussion of current transportation benefits and other recent developments, see the Tax Clinic, edited by Robert Zarzar, in the July 1999 issue of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser


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