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Tax Advantages of Pre-tax Salary Deduction
Tax-free transit benefits provided as a pre-tax benefit permits your employees to have up to $110 per month taken out of their current monthly pay, towards the actual cost of commuting on transit before taxes are applied. They would save federal income and payroll taxes on the amount of the benefit selected. Up to $1,320 a year of their wages or salary would be treated as a tax-free benefit rather than as taxable income. Their W-2 forms would reflect a reduction equal to the amount of the benefit. Many employers prefer this option because the employee pays the cost. Your share of FICA and unemployment taxes are also reduced.
| Assumptions: | Employee pays 27.5% in federal income tax
Employee pays 6% in state income tax |
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If a private employer provides tax-free transit benefits to an employee at the maximum of $110 per month ($1,320 per year) through pretax salary deduction, this is the cost to the employee: | Cost of tax-free transit benefit | $1,320 | | Federal income tax (27.5%) saved | ($363) | | Employee FICA (7.65%) saved* | ($100.98) | | State income tax (6%) saved | ($79.20) | | Total cost to employee | $776.82 |
This is the SAVINGS to the employer: | Base amount paid for tax-free transit benefit | ($1,320) | | Money deducted from employee salary to pay for tax-free transit benefit | $1,320 | | Actual cost to employer | $0 | | Employer FICA (7.65%) saved | $100.98 | | Employer unemployment tax saved* | $81.84 | | Net savings to employer compared to cash salary payment | $180.18 |
*Federal Unemployment Tax payable on first $7,000 of each employee's salary per year
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