In Illinois, there are three ways to offer a tax-free commuter benefit for employees:
1. Employer-Paid Subsidy
Fully subsidize your employees’ transit passes, Pace Vanpool fares, or employees' parking costs when they share the ride. These employer-provided benefits are less expensive than offering a salary increase since you avoid payroll taxes on the benefit and the employee’s federal income taxes will remain the same.
2. Employee-Paid Pre-Tax Withholding
Employees can pay for commuter fares and qualified parking expenses through their own pre-tax dollars withheld from their paycheck--which reduces taxes on them while your company saves on payroll tax.
3. Combination of Subsidy and Pre-Tax
You can provide a portion of the employee's commute costs as a tax-free benefit while also allowing employees to use their own pre-tax income to cover the remainder of their bus, train, Pace Vanpool fare and/or parking expenses.
With this benefit, there is no extra IRS reporting required (such as W-2 or 1099 statements) and no minimum number of employees that must be added to the subsidy or pretax benefit. Companies can set up transit benefits for any number of employees.
Employee salary deferrals and employer contributions to qualified transportation benefit programs are non-taxable, provided they do not exceed the maximum exclusion amount. There are two types of benefits – one for parking and another for transportation (which includes vanpooling). Each limit is subject to annual increases for inflation. See the Qualified Transportation Fringe Benefit IRC § 132(f) for the monthly limit amounts. An employee can receive both parking and public transit benefits in the same month if the total received is no more than the applicable exclusion limit for the two types of benefits.
These contributions are not considered wages for federal income tax purposes, including federal income tax withholding, and they are not subject to the Social Security and Medicare tax (FICA) or federal unemployment insurance (FUTA). The reduction in employees’ taxable income results in a savings for both employees and employers.
You can administer this program in-house or through a third-party vendor such as the RTA Transit Benefit Fare Program. The Regional Transportation Authority (RTA) oversees finances and transit planning for Chicagoland’s public transportation agencies. They developed a comprehensive benefit program offering solutions, a cost saving calculator and prepaid cards for all commute options (CTA, Metra, Pace bus and vanpooling) and parking. Learn more online, email: roxann.galvan@rtachicago.com or contact RTA at (312) 913-5523, Monday – Friday, 8:00 am – 4:00 pm.
The Internal Revenue Code allows business owners and employers to offer nontaxable qualified transportation fringe benefits under Sec. 132(f). The employer reviews the options and decides how to structure the benefit, how employees will enroll, and how the program will be maintained. Once the company policy and procedures are developed, set up the benefit for pre-tax deductions and/or subsidize. Consult a tax accountant, bookkeeper, payroll, or benefits administrator to ensure compliance.
Depending on the benefit design, employees can pay for commuter costs with a prepaid card, check, Ventra Card, direct deposit to a parking provider, or parking reimbursement.
If your benefit includes paying for Pace Vanpooling directly, not through a third-party vendor, complete the below Vanpool Incentive Program (VIP) Employer Agreement and email it to PaceVanpool@pacebus.com.
