Commuter Tax Save Program

The Internal Revenue Code permits employers to assist their employees with public transit and vanpooling commutation costs. This can be done in three ways:

Direct Contribution - tax free for employee, tax deductible for employer
Pre-tax Payroll Deduction- reducing tax payments for employee and employer
A combination of the above

The pre - tax payroll deduction is the most popular benefit option.

How Does The Commuter Tax Save Benefit Work?

The amount that is tax free is capped. The IRS sets the cap annually. Transit benefit cap is $230/month in 2011
These funds are then excluded in the following tax calculations:

Employee - Federal Income Tax
Employee - Social Security and Medicare Payroll Taxes
Employer - Matching Social Security and Medicare Taxes

Commuter Tax Save Example

Assume that the employee's transit or vanpool commutation cost is equal to the present cap of $230 monthly ($2,760 annually).

In the most common federal income tax bracket of 25%, an employee's income tax savings is $690 a year. In addition, the employee and employer both avoid paying the 7.65% payroll tax for Social Security and Medicare on the same amount, so both save $211 annually.

The employee saves a total of $901 annually (32.65%) which otherwise would have gone to federal taxes.
The employer saves $211 for each such participating employee.