Commuter benefits are one of the most underutilized tax-advantaged perks in the small business benefits toolbox. While they don’t get the same attention as health insurance or retirement plans, they offer something rare: a genuine win for both employers and employees with almost no administrative complexity. Employees pay less in taxes. Employers pay less in payroll taxes. And neither party has to spend much time or money making it happen.
According to the U.S. Census Bureau, the average American commuter spends $2,000 to $5,000 per year on commuting costs — transit fares, parking, and fuel. In high-cost metro areas near New Jersey like New York City and Philadelphia, those numbers are often higher. For an employee commuting into Manhattan via NJ Transit, monthly rail passes alone can run $300 to $500. The commuter benefits rules allow a substantial portion of those costs to be paid with pre-tax dollars — which is a benefit worth understanding and communicating clearly.
How Commuter Benefits Work
Commuter benefits are governed by Section 132(f) of the Internal Revenue Code, which allows employers to provide “qualified transportation fringe benefits” to employees on a pre-tax basis. There are two main categories: transit passes (including subway, bus, train, ferry, and vanpool) and qualified parking (at or near the workplace, or at a transit facility like a park-and-ride).
For 2024, the IRS monthly limit for each category is $315. That means an employee can exclude up to $315 per month in transit costs and up to $315 per month in parking costs from their taxable income — a potential annual exclusion of $7,560 between the two categories. These limits are indexed for inflation and have risen significantly from $270 in 2021.
The pre-tax treatment reduces the employee’s federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) on the excluded amounts. For an employee in the 22% federal bracket, excluding $315/month in transit costs saves approximately $94 per month in taxes — about $1,130 per year. The employer saves the matching 7.65% FICA on those same dollars, reducing payroll tax costs by roughly $289 per employee per year who participates.
Transit Benefits: What’s Covered
Qualified transit benefits cover a wide range of transportation modes. Eligible expenses include: bus passes, subway and light rail fares, commuter rail passes (NJ Transit, SEPTA, LIRR, Metro-North), ferry tickets, vanpool fares, and transit passes on commuter-focused services. Rideshare services like Uber and Lyft are not covered under transit benefits — a common misconception. Standard Uber/Lyft rides are explicitly excluded from the definition of qualified transportation.
Bicycle commuting was briefly included as a qualified commuter benefit under the Tax Cuts and Jobs Act of 2017 but was suspended for employer reimbursements. Some states, including New Jersey, have enacted their own bicycle commuter benefit rules. Employers in NJ should check current state rules, which may differ from federal.
Transit benefits can be structured as an employer-provided benefit (employer pays and excludes the value from income) or as an employee salary reduction arrangement (employees redirect pre-tax pay to fund transit costs). Both approaches achieve the same tax result, but the salary reduction model is far more common because it doesn’t require the employer to spend additional money — employees simply redirect existing compensation.
Parking Benefits: What’s Covered
Qualified parking benefits cover parking at or near the employer’s business premises, as well as parking at a mass transit facility used for commuting (like a park-and-ride lot). This includes parking garages, surface lots, and metered spots — as long as they’re used for commuting, not personal errands or business travel.
Parking benefits are completely separate from transit benefits — employees can elect the maximum for both simultaneously. An employee who drives to a train station, pays for parking, and then takes a commuter rail into the city could exclude $315/month in parking and $315/month in transit, for a combined $630/month exclusion. For employees in high-cost commuting markets, this is a meaningful annual tax savings.
Remote employees who don’t commute to a workplace cannot claim commuter benefits — the benefit is tied to commuting for work. In hybrid arrangements, employees can elect benefits each month based on actual commuting patterns, scaling up or down as their schedule changes.
How to Implement a Commuter Benefits Program
There are two primary ways to administer commuter benefits: through a third-party benefits platform or through payroll software with a manual process. Third-party platforms — WageWorks (now HealthEquity), Commuter Benefit Solutions, Luum, Edenred, or Beneco — handle enrollment, deduction processing, and fund disbursement automatically. Employees access their benefits through a portal or a pre-loaded debit card that works at transit vendors and parking facilities.
For small businesses with fewer than 25 employees, some payroll providers (Gusto, Rippling, Justworks) include basic commuter benefit functionality natively, which can simplify administration. The tradeoff is less flexibility than a dedicated platform, but for straightforward transit/parking arrangements, the native functionality is often sufficient.
Setup typically takes one to two weeks: choose a platform, complete employer enrollment, notify employees, and activate payroll deductions. Employees select their monthly election amount (up to the IRS limit) and the benefit platform manages the rest. Most platforms allow employees to adjust elections monthly, which is important for hybrid workers whose commuting frequency varies.
New Jersey-Specific Commuter Benefit Rules
New Jersey has its own commuter benefits law — the New Jersey Commuter Transportation Benefit Program Act — that applies to employers with 20 or more employees. Under this law, employers must offer employees the opportunity to use pre-tax income for transit costs up to the federal limit. This is a requirement, not just a nice-to-have, for covered New Jersey employers.
The NJ law applies to employees who work in NJ and use public transit, vanpools, or qualified parking. Employers subject to the law must notify employees of the benefit annually. Penalties for non-compliance can reach $250 for a first violation and $500 for subsequent violations per employee. Small businesses in New Jersey with 20+ employees should ensure they are in compliance — a topic a benefits broker familiar with NJ law can help navigate.
New York City has a similar ordinance requiring employers with 20+ full-time employees to offer pre-tax transit benefits. Employers operating in multiple metro areas should be aware of local rules that may impose commuter benefit obligations beyond federal law.
Tax Treatment for Self-Employed Individuals and S-Corp Owners
Commuter benefits under Section 132(f) apply to employees — W-2 workers. Self-employed individuals, sole proprietors, and partners in partnerships cannot exclude commuter benefits from their own income. S-corporation shareholders who own more than 2% of the company are treated as self-employed for fringe benefit purposes and cannot receive tax-free commuter benefits either.
This is a nuance that affects many small business owners who pay themselves a salary through an S-corp. While you can establish a commuter benefits program for your employees, you cannot participate in it yourself on a pre-tax basis. Your commuting costs remain a personal non-deductible expense. A tax advisor can confirm the rules for your specific ownership structure.
Communicating Commuter Benefits to Employees
Commuter benefits are consistently among the most underutilized benefits in small business packages — not because employees don’t want them, but because they don’t understand them or don’t know they exist. A 2022 Commuter Benefit Solutions survey found that only 34% of employees who were eligible for commuter benefits were actively using them.
Effective communication should include: a clear explanation of the tax savings (specific dollar examples resonate better than percentages), instructions for how to enroll, a reminder that elections can be changed monthly, and a note on what’s covered and what’s not (to prevent confusion about rideshares). Many employers include commuter benefits in onboarding materials and open enrollment guides but forget to remind employees mid-year — when someone realizes they’re now commuting to a new office location, they may not know they can start a transit benefit.
Frequently Asked Questions
Can employees participate in both transit and parking benefits simultaneously?
Yes. The $315/month transit limit and the $315/month parking limit are completely independent. An employee who takes transit to work and pays for parking at a transit hub can elect up to $315 for each, for a combined monthly exclusion of $630. The two categories don’t interact or offset each other.
What happens to unused commuter benefit funds?
Unlike Health FSAs, there is no “use it or lose it” rule for commuter benefits. Unused funds in a commuter benefit account roll over month to month and can be used for future commuting expenses. There is no annual forfeiture deadline. If an employee leaves the company, they typically have a short window to spend any remaining balance before the account closes.
Do commuter benefits affect HSA eligibility?
No. Commuter benefits and HSA eligibility are completely independent. An employee can participate in a commuter benefits program and contribute to an HSA simultaneously without any interaction or restriction between the two benefits.
Can remote employees participate in a commuter benefits program?
Remote employees who never commute to a work location cannot participate in commuter benefits — the benefit is specifically for commuting expenses. Hybrid employees who commute on some days can participate and elect an amount appropriate for their actual commuting schedule. They can adjust elections monthly based on how often they plan to commute that month.
Is there a state income tax exclusion for commuter benefits in New Jersey?
New Jersey does not conform to the federal tax exclusion for employer-provided transit benefits. NJ Transit benefits that are excluded from federal income tax are not excluded from NJ state income tax — employees must add back the federal exclusion when computing NJ taxable income. Parking benefits follow different rules. This is a complexity unique to NJ that employees should understand when calculating their actual tax savings.
Add Commuter Benefits to Your Package — It’s Easier Than You Think
Commuter benefits are one of those benefits that seem complicated until you actually set them up — at which point most employers realize it took less than an hour of work and now essentially runs itself. The tax savings for both employer and employee are real and ongoing, with no ongoing complexity.
Garden State Benefits, led by broker Paul Z Olah, helps small businesses across New Jersey and beyond navigate the full landscape of tax-advantaged benefits — from commuter programs and FSAs to group health insurance and voluntary benefits. Whether you’re building your first benefits package or optimizing an existing one, Paul can help you find every available tax advantage.
Call 856-880-6340 or email paul@gardenstatebenefits.com. At Garden State Benefits, you call and Paul answers.