Pre-tax transit benefits are a great way for employers to save money, boost morale, and encourage workers to return to the office. In this guide, we'll cover everything you need to know about pre-tax transit benefits, including what they are, how they work, and how to set up a pre-tax commuter benefit plan with Jawnt. 

What are Pre-Tax Transit Benefits?

Pre-tax transit benefits are a type of fringe benefit (employee benefit beyond salary) that allow employees to have their monthly commuting costs deducted from their pay before taxes are applied (e.g., income tax withholding, social security and medicare taxes, unemployment tax). This means employees are taxed on a smaller portion of their income, allowing them to take home more of the money they earn. 

How do Pre-Tax Transit Benefits Work?

Typically, an employer will offer this benefit by signing up with a third-party benefits provider. If the employee wants to enroll in the program, they will need to enroll in benefits through their employer’s commuter program. The employer can deduct the employee’s chosen amount from the employee’s paycheck pre-tax and the third-party provider will handle the delivery of the transit benefit. 

The sponsoring of the employee’s commuter costs can come in the form of a credit card, debit card, pre-paid smart card (e.g., a MetroCard in New York City or a SEPTA Key card in Philadelphia), voucher, or digital ticket (i.e., a ticket available via a mobile app). 

The amount that employees can contribute to their transit account is determined by the federal government and can change from year to year. As of 2023, employees can allocate up to $300 per month ($3.6k / year) of their pre-tax earnings towards commuter benefits. Additionally, employees can contribute another $300 per month towards parking costs. Anything over that threshold will be considered a post-tax benefit. 

Pre-Tax Transit Benefits Eligible Expenses

Pre-tax transit benefits cover a wide array of commuting-related costs, including:

• Subway fares
• Train fares
• Trolley fares
• Bus passes
• Ferry passes
• Vehicles with at least six passenger seats (i.e., vanpooling, Lyft or Uber shared rides)

Separately, employees can also allocate another $300 of their pre-tax income to cover parking expenses, including:

• Parking near work
• Parking near mass transit areas (i.e., Park & Rides) 

There’s also a class of transit-related expenses that are not covered by pre-tax commuter benefits. This includes:

• Gas
• Tolls
• E-ZPass
• Taxis
• Car insurance
• Personal Uber or Lyft rides
• Limousines
• Bike share programs (i.e., CitiBike, Indego, Lime)

Why do Companies Offer Pre-Tax Transit Benefit Programs?

There are several advantages of a pre-tax transit benefits program for both employees and employers. For employees, pre-tax transit benefits can:

• Save money. By using pre-tax dollars, employees can save up to 30% on their commuting costs.
• Boost morale. Employees feel valued and appreciated when their employer provides benefits that improve their quality of life.
• Encourage employees to return to the office. In a post-COVID world, reducing the cost required to get to work is one way employers can incentivize employees to return to the office and reap the benefits that come from working together in-person. This includes increased camaraderie, morale, productivity, collaboration, learning, and retention

For employers, pre-tax benefits can:

• Save money. When employers offer pre-tax commuter benefits, they save an average of 7.65% on payroll taxes per employee. The more employees that enroll in the program, the greater the potential savings.
• Improve hiring and retention. For the same reasons pre-tax commuter benefits can boost morale, they can also incentivize prospective hires to accept an offer, or keep existing employees engaged and motivated.
• Protect the environment. For eco-conscious employers, pre-tax commuter benefits plans incentivize employees to utilize public transportation rather than driving their own car, which can reduce carbon output and assist employers in reaching their sustainability goals. 
• Ensure employees get to work safely. Public transportation tends to be safer than individual driving, meaning employers increase the likelihood that their employees arrive at work safely and on time. 
• Help employers stay in compliance with local laws. Some cities and states require certain employers to offer pre-tax commuter benefits. Locales with such ordinances include Philadelphia, New York City, Washington D.C., Seattle, Los Angeles, San Francisco, and the State of New Jersey.

As you can see, pre-tax commuter benefits can be a win-win for both employees and employers. 

Pre-Tax Transit Benefits Cost Savings Example

To illustrate the employer cost savings that are possible with pre-tax commuter benefits programs, let’s walk through an example.

Say an employee earns $5k per month before taxes. As such, their FICA liability (tax for Social Security and Medicaid) is $382.50 ($5,000 x 7.65%). This means both the employee and employer pay $382.50 per month towards Social Security and Medicaid. 

Say that same employee contributes $300 per month towards their pre-tax commuter benefit plan. This reduces their taxable income to $4,700 per month, which means the FICA tax owed is now $359.95 ($4,700 x 7.65%). That’s a difference of $22.55 per month, or $270.60 per year. The tax savings become significant as more employees enroll. 

For employees, it’s estimated that enrolling in transit benefits can save them nearly 30% on their transit expenses (based on a federal tax rate of 15%, state tax rate of 5%, and 7.65% FICA). If an employee earns $60k per year but contributes $300 per month towards transit benefits, they’d only be taxed on $56,400 of their income ($60k - $3.6k). This would mean they take home nearly $1k more per year:

$60k x 27.65% = $16,590 owed in taxes

$56,400 x 27.65% = $15,594.60 owed in taxes

 $16,590 - $15,594.60 = $995.40

Pre-Tax Transit Benefits: FAQs

Besides what we’ve already covered, here are a few other questions that come up when discussing pre-tax commuter benefits.

How many employees need to sign up for pre-tax commuter benefits?

There is no minimum number of employees required to sign up for pre-tax commuter benefits. However, the program must be offered to all employees and cannot be limited to just a select few. 

What are the tax-free limits?

The tax-free limit for pre-tax commuter benefits plans in 2023 is $300 per month. The tax-free limit for parking expenses is also $300. 

Are pre-tax transit benefits tax deductible?

No, pre-tax transit benefits are not tax deductible for employees. However, as detailed above, by using pre-tax dollars to pay for commuting expenses, employees can reduce their taxable income, which can lower their overall tax bill.

Are employers required to offer pre-tax commuter benefits?

Employers are not required by federal law to offer transit benefits. However, some local and state governments have implemented transit benefit ordinances, which require certain employers to offer transit benefits to their employees. It's important for employers to check with their local and state governments to determine if there are any requirements in place. 

How to Set Up a Pre-Tax Transit Benefits Plan

Most employers use a third-party administrator to set up their pre-tax transit benefits plan. These providers can handle implementation and ongoing administration of the benefits program (i.e., issuing cards, enrolling employees on the platform, etc.). Most providers charge a per-employee fee. Some local transit agencies also provide pre-tax transit plans to employers, but managing another benefit can be burdensome for already taxed HR teams to take on themselves because of the additional administrative work needed to keep the program operational. 

Once the plan is in place, it’s important for the organization to communicate the new plan to employees to encourage enrollment. This means educating employees on the benefits of pre-tax transit benefits, including eligible expenses and how much they can contribute. 

Once employees enroll, the employer will have to adjust their payroll processes to ensure their pre-tax transit benefits plan contribution is withheld from their taxable income in future payroll cycles. 

Jawnt Can Help With Pre-Tax Transit Benefits

Jawnt is a unified transit platform that makes it easy for employers to provide pre-tax transit benefits (and post-tax benefits) to their employees. From hassle-free enrollment to comprehensive support, Jawnt's user-friendly platform enables both employers and employees to get the most out of their pre-tax transit benefit. To learn more, visit our website.