Many employers opt to provide their employees with transportation benefits in addition to their regular compensation. Employers can offer this extra perk in the form of transportation passes, parking vouchers, or both. The transportation fringe benefit is income tax free to employees, up to a certain limit. For 2008, the monthly limitation on the amount that may be excluded from an employee's income is $220 for qualified parking benefits (a $5 increase from the 2007 limit) and $115 for transit and vanpooling expenses, combined (also a $5 increase from the 2007 limit).

Qualified transportation

Qualified transportation fringe benefits that you provide to your employees can be excluded from employee income, up to certain limits (as discussed above). A qualified transportation fringe benefit includes:

• Transportation in a commuter vehicle, such as van pooling;
• A transit pass, or
• Qualified parking.

A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) or a commuter highway vehicle for free or at a reduced rate.

Qualified parking is parking provided to an employee at or near the employer's place of business. It also includes parking provided at or near the location from which the employee commutes to work in a commuter vehicle or carpool. It does not include parking at or near the employee's home.

Dollar limits

For 2007, the exclusion for commuter vehicle transportation and transit pass fringe benefits can be no more than $110 a month ($115 for 2008), regardless of the total value of both benefits. The exclusion for the qualified parking fringe benefit cannot be more than $215 a month ($220 starting in 2008). Any excess over these limits must be included in the employee's income.

Transportation dollars

Employees can designate the dollar amount of transportation benefits they wish. This amount is subtracted from the employee's gross compensation, pre-tax, on a periodic basis. The employer (or designee) purchases vouchers or passes for parking or transportation and distributes them to employees in the amounts corresponding to each employee's transportation dollar designation.

Tax reporting

The amount by which an employee elects to reduce his or her cash compensation in exchange for qualified transportation fringe benefits is not subject to FICA, FUTA, or income tax withholding. However, any amount that exceeds the monthly limit is included in the employee's income, is treated as wages for income tax and employment tax purposes, and is reported on the employee's Form W-2, Wage and Statement.

In addition to reporting and depositing other employment taxes, employers are required to report and deposit amounts withheld from cash reimbursements. Qualified transportation benefits can be provided directly by the employer or through a bona fide reimbursement arrangement. However, there are special rules regarding when cash reimbursements, rather than vouchers, qualify.

If an employee receives a pass in advance, then terminates employment, the value of the pass for months in which the individual is not an employee is included in the employee's wages for income tax purposes. The exception to this rule is a pass that was not distributed more than three months before it was determined that the employee's employment will terminate.

Voucher agents

Employers may wish to contract with an independent company to handle employee transportation and parking vouchers. Depending on the contract, the "voucher agent" may handle obtaining vouchers or passes, keep track of the employee transportation dollar designation, and maintain tax records. However, the employer is ultimately liable for federal income tax and employment tax reporting.

If you are considering implementing a transportation fringe benefit program for your employees, please give our office a call to discuss the tax consequences and for assistance in designing a program that works best for your company.