WHEN EMPLOYERS HELP PAY WORKERS’ COMMUTING EXPENSES, BOTH BENEFIT, THANKS TO THE TAX CODE’S GENEROSITY: GET A LIFT TO WORK FROM UNCLE SAM

Employees spend a considerable sum of money getting to and from work, yet despite the fact that this expenditure is directly related to their job, workers cannot deduct their commuting expenses. To add insult to injury, these expenses must be paid with after-tax dollars — income that’s already been taxed.

Wouldn’t it be nice if employers could help their employees pay their commuting costs and get a tax deduction to boot? Well, guess what? Although commuting expenses cannot be deducted by employees, employers can help with these costs, get a tax deduction by doing so and reduce their employee’s taxable income.

Here’s the scoop:

The tax law as amended in 1992 permits employees to exclude from their taxable income certain commuting expenses that are reimbursed by their employer. Specifically, an employer can provide parking space for employees at company expense.

The space provided can be on a company lot or at a commercial garage. It can even be at a lot near a train or subway station or in a carpool area that the employee drives to. Up to $175 a month for such parking expenses is tax-deductible by the employer and is not taxable to the employee.

taken off the top

Another way employers can help employees with their commuting expenses is to contribute to their subway, train or bus fare. Up to $65 a month of such reimbursements is tax deductible by an employer.

To get an idea of the benefit an employer can bestow upon workers, assume that a company provides an employee with a total commuting benefit of $200 a month, representing $150 for parking and $50 for subway and bus fare. If that employee is in the 33% combined federal-state tax bracket, the employer is providing the equivalent of a $3,600 yearend bonus.

Especially nice about this provision: What is being provided to the employee is excluded from taxable income, not deducted. Exclusions are worth more than deductions. That’s because exclusions do not appear on an employee’s tax return. Which means they do not add to adjusted gross income and do not affect the employee’s ability to take deductions that are limited to those whose AGI falls below a specific limit. Nor is the alternative minimum tax triggered by this exclusion.

It gets better. Neither the employer nor the employee pays any payroll tax on this benefit. Even those whose taxable income already exceeds the maximum for Social Security taxes get a break. There are no Medicare taxes (1.45% of taxable income) to be paid.

For a company with, say, 20 employees, the payroll tax savings for each individual employee from providing these commuting benefits may not be substantial, but they can really add up for the employer.

And while employees in lower tax brackets, say 15%, may not get that much out of this benefit in terms of income tax savings, they benefit on an equal footing with their higher paid co-workers when it comes to the avoidance of payroll taxes, which are currently 7.65% off the top.

The icing on the cake for employers providing commuting expense benefits is that there are no Internal Revenue Service-imposed nondiscrimination provisions to contend with. That means there are no restrictions on who can receive these benefits. An employer can provide these benefits to anyone he or she likes. The employer can provide them to everyone, or just to executives. The IRS doesn’t care.

something for everyone

Even business owners can take a slice of this cake, if their business is incorporated and they are on the corporation’s payroll as an employee. And there are no restrictions for closely held corporations: A one-person corporation qualifies. (Unfortunately, self-employed people and S corporations cannot share in this windfall.)

One pitfall to avoid: These benefits become taxable if they are provided instead of wages. For example, an employee’s wages are reduced by a comparable amount or an employee is given the option of choosing between wages and this commuting benefit. Never offer that choice to an employee.

When there are funds available to reward employees, an employer may elect to provide this benefit instead of giving a deserving employee a raise. The employer gets the same deduction he would get if he granted a pay raise but saves on payroll taxes, since the employee is not getting a pay raise. And the employee also saves on payroll taxes.

Such a deal!

Milton Zall is a registered investment adviser based in Silver Spring, Md.