Tax Benefits

Want to attract and retain quality employees?  Think about offering tax-free transportation fringe benefits that support alternative transportation options for your employees.  These options can offer cost savings for you and your employee and lead to happier, more productive workers by reducing their commute stress.  You’d also be helping to ease traffic congestion and combat global warming by reducing gas emissions.  Here’s how the tax benefits work:

Commuter Tax Benefits:  Section 132 of the federal tax code allows private employers, non-profit organizations and public agencies to provide transit benefits (also called “commuter benefits” or “transportation fringe benefits”) to employees tax-free.  On Oahu, these benefits include:

ü       TheBus and TheBoat passes ($40/month)

ü       LOTMA Commuter Express passes ($95/monthly or $55/20-trip)

ü       Vanpool Hawaii seat fees ($55-$70/month)

When you pay for any of these commuter benefits or allow your employee to pay for the benefit through payroll deductions, up to $115 per month (for tax year 2008) is treated as excludable fringe benefits which means the amount is not counted as taxable wages.  Therefore, these amounts are not subject to withholding or payroll taxes (FICA and unemployment taxes) saving both employers and employees on taxes.  And since the State of Hawaii’s tax code mirrors the federal code with respect to this benefit, the same amounts are treated as non-taxable wages at the State level, too.

These commuter benefits may be offered in three ways:

Employer Pays

The employer can pay for the full cost of the transit benefit for an employee.  The employer can deduct the full amount of the subsidy as a business expense from its federal and Hawaii income taxes thereby reducing the actual cost of the benefit by its applicable federal and State tax rates.  The employer does not include the amount of the transit cost (up to $115 per month per employee) in the employee’s wages and, therefore, does not incur payroll taxes:  FICA (Social Security and Medicare) at 7.65% and federal and state unemployment taxes on the benefit amount.

Employee Pays

The employer can allow an employee to take a monthly pre-tax payroll deduction for the amount of the transit benefit (up to $115 per month).  Because the amount is not considered taxable wages, the employer avoids paying payroll taxes (FICA and federal and state unemployment taxes).  The employee saves by not paying federal and state income tax and payroll taxes (FICA) on the amount deducted.  As an example, a single person who earns $60,000 a year would save around 40% on the cost of a monthly LOTMA Commuter Express pass, effectively reducing the cost from $95 to about $57.

Employer and Employee Share Costs

The employer and employee share the costs of the benefit with the applicable savings as discussed in the above two options.  This option may require more administration to implement.

Administration of Tax Benefits:  Administration of these benefits is much simpler than other pre-tax benefit programs.  No written plans or reporting are required by the IRS but you can create them if desired.  There is no “use-it-or-lose-it” provision, and the employer can choose how often to allow employees to make elections.  And employers can offer any amount (within the $115/month limits) to any employee or group of employees because there is no “nondiscrimination test.”

How to Get Started:  To access these tax benefits, employers must go through TheBus BONUS! Program which provides either TheBus passes or BONUS! Checks (vouchers which may be used to purchase monthly passes for TheBus, Vanpool Hawaii or the LOTMA Commuter Express).  Employers cannot reimburse their employees and must purchase the passes or vouchers for employees taking payroll deductions.  TheBus charges no additional fees and implementation of the BONUS! Program is easy and convenient.

Or if you use a third-party administrator, such as Ceridian or WageWorks, talk to your representative about setting up a commuter benefits program through them.

Additional Information:  Here are some links where you can learn more about the commuter tax benefits:

¨       TheBus BONUS! Program

¨       Best Workplaces for Commuters

¨       Internal Revenue Code Section 132(f)

¨       IRS Regulations 26 CFR §1.132-9 “Qualified Transportation Fringes”

¨       IRS Publication 15-B, “Employer’s Tax Guide to Fringe Benefits”