The City of Seattle passed a Commuter Benefits Ordinance, which became effective on January 1, 2020.
Ordinance SMC 14.30: Employers located in the city of Seattle with 20 or more employees must allow a covered employee to make a monthly pre-tax payroll deduction for transit or vanpool expenses. The ordinance encourages commuters to use transit options other than single-occupancy vehicles, thus reducing traffic congestion and carbon emissions. Because the deduction is pre-tax for federal taxes and payroll taxes, the law has the added benefit of lowering costs for both workers and businesses.
The pre-tax exclusion amount under the Internal Revenue Code §132(f) for qualified commuter benefits applies to the following: A ride in a commuter highway vehicle between the employee’s home and workplace; a transit pass; or qualified parking. You can generally exclude the value of transportation benefits that you provide to an employee during 2020 from the employee’s wages up to the following limits: $270 per month for combined commuter highway vehicle transportation and transit passes, and $270 per month for qualified parking. For a total of $540 per month in tax-free benefits but no more than $270 for either category.
While the Internal Revenue Code also allows pre-tax deductions for parking expenses, Ordinance SMC 14.30 does not require a business to offer pre-tax deductions for parking. However, offering qualified parking as part of your commuter benefits plan would increase the amount of savings recognized by your business.
The savings on payroll tax, Social Security and Medicare, is 7.65% of the amount each employee spends on commuter benefits through a payroll deduction. For example, if each month the combined total of all employees’ commuter benefits is $6,750 (50 employees each use 50% of the total benefit required by Seattle Ordinance SMC 14.30, $135 * 50 employees); $6,750 * 7.65% = $516.38 per month. If the restaurant has 25 employees that use 50% of the benefit your savings would be $258.19 per month. If the restaurant has 100 employees that use 50% of the benefit your savings would be $1032.75 per month.
Employers can administer a program internally or use a third-party administrator to manage the program.
What is the rollout timing of the law?
Ordinance SMC 14.30 took effect on January 1, 2020.
What are the penalties if the law is not followed?
The Seattle Office of Labor Standards’ enforcement begins January 1, 2021.
For a first violation of the Ordinance, a civil penalty of up to $500 may be assessed.
For subsequent violations of the Ordinance, within 10 years of a first violation, a civil penalty payable to the aggrieved party of up to $500 per aggrieved party may be assessed.
For an employer with 50 employees a second violation of this Ordinance would cost $25,000. Don’t forget that fines and penalties are not a deductible expense under IRC §162(f) so there will be federal tax charged on the $25,000 fine as well because it does not reduce taxable income.
RASI can setup pre-tax deductions codes on payroll to start your payroll tax saving. RASI provides weekly reports on deduction amounts per employee and in total for ease of managing the plan. Employees’ pay stubs will show the amount deducted each pay period and will also display a year to date value so employees can see how much they spend on commuting each year and saving on taxes.