Eligible transportation services may be provided either directly by employers or through a bona foia reimbursement agreement. A bona foi repayment agreement can also be used with a compensation reduction agreement. A compensation reduction agreement is a way to provide eligible pre-tax transportation benefits. Employees have the choice between cash compensation (also called their salary) or a qualified transportation service. Publication 15-B clarifies that the employer deduction is not available for eligible transportation services, whether provided directly by the employer or through an earnings reduction agreement. A wage reduction agreement is a written agreement between an employee and his or her employer in which the employee chooses an amount of taxable income that is voluntarily deducted from his or her salary. Wage reduction agreements form the basis of section 125 cafeteria plans, which give an employee the choice between taxable income and a non-taxable benefit. After receiving a written explanation of the terms and benefits provided under the Plan, each eligible employee will not become a member until (i) he or she has chosen to participate in the Plan in any of the forms provided by the Committee and (ii) enters into a compensation reduction agreement in accordance with the following terms. Read all the details in Publication 15-B, The Employer`s Tax Guide to Benefits. Employees continue to receive the full tax savings for any input tax deduction for eligible transportation.
However, there are changes that occur from the employer`s point of view. First, employers must reduce their labour costs by the amount of employee deductions before taxes. The amount of the qualified transportation service cannot be taxed by the employer. However, the employer continues to benefit from payroll tax savings on reduced labour costs. The employer saves 7.65% in FCIA out of $1,000 or $76.50. The employee saves an average of 30% at $1,000 or $300. Gross business revenue = $100,000 Gross labor costs = $20,000 Pre-tax employees Transit/parking deductions = $1,000 Adjusted labor costs = $19,000 Taxable income = $100,000 – $19,000 = $81,000 The employer pays taxes on $81,000 at 21% (previously 35%) Each year, the IRS publishes Publication 15-B, an employer tax guide for benefits. In recent years, there have been small adjustments to publication 15-B, but the annual publication goes largely unnoticed.
However, the adoption of the tax reform led to significant changes in 2018. The publication of publication 15-B of 2018 contains, among other things, important information on changes in the tax treatment of suburban services and the suspension of qualified bicycle travel. .