Pre-Tax vs. Post-Tax Commuter Benefits: What to Offer

How much would you need to earn to justify spending $12,650.56 each year on your commute? That’s the price San Francisco’s commuters pay to sit in traffic in the Golden City every day. 

Admittedly, these costs sit at the top of the scale, with average annual costs around $5,750 nationwide. But whatever the magic number, employers can support their employees by offering a range of commuter benefits to offset their specific travel costs. 

The question: Should employers opt for pre-tax or post-tax commuter benefits? 

Pre-tax vs. post-tax benefits

Employers can offer pre-tax and post-tax employee benefits, each with its pros and cons. Pre-tax deductions reduce an employee’s taxable income, meaning they take home more of the money they earn. Businesses also save money on their payroll taxes when they offer pre-tax benefits. On the other hand, post-tax deductions don’t reduce an employee’s taxable income, meaning they don’t affect earnings reported for Social Security benefits or applications for loans, mortgages, or similar. 

Pre-tax benefits 

Alongside some types of commuter benefits, other pre-tax benefits include: 

• Health reimbursement arrangements 
• Flexible spending accounts
• Health savings accounts 
• 401(k) contributions 

Post-tax benefits 

This is a broader benefits category, including: 

• Employee perks 
• Lifestyle spending accounts
• Wellness programs 
• Meal and nutrition programs 
• Childcare and family forming packages 
• Professional development programs
• Rewards and recognition incentives 
• Work from home funds 

How do pre-tax commuter benefits work?

Pre-tax commuter benefits are a set amount that comes directly out of employees’ paychecks before local, state, and federal income tax is applied. IRS Publication 15-B, “The Employer’s Guide to Fringe Benefits,” strictly defines how these benefits work, including eligible expenses and monthly limits. 

For 2024, the limit is $315 per month for commuter highway vehicle transportation and transit passes and a separate $315 per month for qualified parking. Annually, this means employees can allocate up to $3,780 (up from $3,600 the year before) of their pre-tax dollars for commuting costs in each category. Any costs beyond this are considered a post-tax benefit. 

What do pre-tax commuter benefits include?

You won’t pay taxes on the following pre-tax benefits: 

Commuter highway vehicles

According to the IRS, a commuter highway vehicle must seat at least six adults plus the driver. Buses and some ride-sharing services fall into this category so long as at least 80% of the vehicle mileage is used to transport passengers between their homes and workplaces. Employees must occupy at least 50% of the vehicle’s seats, excluding the driver. 

Transit passes 

U.S. Code Section 132(f) defines a transit pass as a “pass, token, fare card, voucher, or similar item.” The pass is suitable for any type of mass transit, such as buses, trains, ferries, and water taxis. This benefit is only tax-free if no voucher is available for your employees. Additionally, employees are required to submit receipts as proof of payment. 

Qualified parking 

Qualified parking is a pre-tax perk that lets employees use up to $315 per month of their paychecks, tax-free, for employer-provided parking at or near the business premises. This excludes parking at an employee’s residence unless it’s necessary for work (e.g., offsite meetings). 

Why offer pre-tax commuter benefits?

Here are three compelling reasons to incorporate pre-tax commuter benefits in your packages: 

• Employees save money: Workers can contribute up to $3,780 annually toward transportation costs and another $3,780 toward parking tax-free. That’s a significant saving each year on commuting expenses.
• Employers save money on payroll taxes: It’s not just employees who reduce their tax bills. Employers offering pre-tax commuter benefits can save an average of 7.65% on payroll taxes per employee. ‍
• Employers can entice employees back to the office: Although many companies are keen to welcome workers back to the physical workplace, many employees are digging their heels in, wanting to keep their work-life flexibility. Some 50% of workers would even accept a pay cut to retain the option of working from anywhere. Pre-tax commuter incentives could turn these numbers around.

How do post-tax commuter benefits work?

Post-tax commuter benefits are different from their pre-tax counterparts. Instead of coming out of an employee’s paycheck before taxes, post-tax benefits are deducted after all applicable taxes have been applied. Essentially, employees pay for these benefits with what’s left over after their wages have already been taxed. 

What do post-tax commuter benefits include? 

Here are some of the commuter benefits that fall in the post-tax bucket: 

Gas

Employers may offer gas cards or gas stipends to help their employees meet the rising cost of filling their tanks. The current average price of gas in the U.S. is $3.53 per gallon, although this varies wildly from state to state, with California’s average at $4.97 per gallon.

Tolls

Tolls can also quickly add up, especially for those who want to use faster routes when they’re covering long distances. Commuters who must pay tolls on their way to work may receive tax-free reimbursement from their employer in the form of cash or E-ZPass payment collection.  

Car insurance

The average cost of full-coverage insurance in the U.S. is $2,008 per year or $167 per month. Employers may choose to partially or fully offset these costs for their workers. 

Company cars 

Employers may also offer company cars to cover the cost of vehicle ownership. While employers are responsible for maintenance and taxes on the vehicle, they can require drivers to keep accurate records of their mileage through a vehicle log book.

Uber, Lyft, or taxi rides

For employees who either don’t drive or prefer to avoid public transportation, ride-hailing apps like Uber and Lyft are super convenient. By securing credits in bulk from these services, employers can offer their workforce reduced ride fares. 

Bike share programs 

The IRS has suspended the exclusion of certain qualified bicycle commuting reimbursements from employees’ income until 2026. Instead, employers may offer bike share programs, such as CitiBike, Indego, or Lime, as a post-tax arrangement. 

Mileage reimbursements 

The IRS provides standard mileage reimbursement rates, currently 67 cents per mile, to help employers calculate how much they should reimburse staff who use their vehicles for work purposes, including commuting. 

Hybrid charging stations 

Incentives to switch to electric and hybrid cars are increasingly attractive to eco-conscious employees and businesses alike. Offering employees the use of charging stations at work may encourage them to switch, saving them money on gas while reducing their carbon footprint. 

Why offer post-tax commuter benefits?  

While they don’t provide the same upfront tax savings, post-tax commuter benefits offer significant value as they: 

• Support workers with the cost of living: 42% of Americans say their financial situation is worse today than a year ago, according to Zety’s Financial Habits and Health survey. Depending on the offering, the right benefits mix offers financial relief.
• Enhance your reputation as a sustainable employer: Openly promoting a broad mix of commuter benefits proves your commitment to corporate social responsibility. 
• Offer more versatility in your benefits package: Pre-tax benefits are strictly defined and don’t necessarily cover everything you want to offer your employees. Post-tax benefits can plug the gap in your offering by providing reimbursements that exceed pre-tax limits or just aren’t covered by pre-tax plans. 

Create flexible commuter benefits with Benepass

Both pre-tax and post-tax commuter benefits offer advantages for employees who need help with the financial burden of traveling to and from work. 

Benepass Commuter is a versatile package for employers who want to serve up the best of both worlds to their employees. Companies can opt for their program to be pre-tax or post-tax, adding eligible spending categories such as gas, toll roads, and bike share programs, which a strict pre-tax account would otherwise not cover. Here’s how our program works: 

1. Employers who want to offer commuter benefits select their spending categories, such as public transportation, carpooling, parking, etc. 
2. Employees enroll in the commuter account and elect their contributions during open enrollment. 
3. Benepass connects to your payroll system and automatically enrolls your employees. 
4. Invited employees start using the Benepass commuter program. 

Ready to make tax savings on the cost of your employees’ commute? Request a free demo of our Benepass platform today or contact sales@getbenepass.com to connect with a benefits specialist.