Employees appreciate this benefit and there’s a bonus for your company: You can save money on payroll taxes. Similar to a cafeteria plan election, staff members can have money deducted on a pre-tax basis to be applied toward the transportation benefits. Both the company and the employee avoid payroll taxes on the salary reduction.
In another option, employees can be given the choice of taking the benefit in cash. However, if an employee takes cash, the amount is included in the employee’s compensation and subject to employment taxes.
Under the tax law, the categories of employer-provided fringe benefits for qualified transportation for 2023 are as follows:
1. Public transit passes for light rail, bus, subway or ferry worth up to $300 a month in 2023 (up from $280 in 2022).
2. Parking expenses, worth up to $300 a month (up from $280 in 2022). The parking space must be on, near your business location, or at a location where staff members leave their cars and then commute to work by public transportation or carpool.
So your company can provide up to $600 in monthly tax-free benefits per employee in 2023. This includes $300 parking, plus $600 in passes or rides. If you give more, the excess must be treated as taxable compensation.
Some limitations: Shareholder-employees of C corporations can collect qualified transportation perks but they’re not available as a tax-free fringe benefit to partners, 2%-or-more shareholder-employees in an S corporation or independent contractors. Talk with your tax adviser about the best way to set up a program.