Why it matters: The Internal Revenue Service (IRS) has provided a reminder to employers about the tax implications of employer-provided parking in Information Letter 2014-0017. If an employer provides a free parking benefit for employees that exceeds the maximum amount that may be excluded from an employee’s income per month, then the value of the benefit exceeding that limit must be included in the employee’s wages for income and employment tax purposes, the agency explained. Up to $250 per month can be excluded from income for “qualified parking,” but in major cities the value may tip over the monthly allowance, triggering tax withholding requirements. Employers that provide qualified parking to employees would be well advised to review the value of their perks to ensure they are not facing potential tax liability.
In response to a request from an employer providing on-site parking to its employees, the IRS published a letter setting out information on the taxation of employer-provided parking.
The definition of gross income excludes benefits that meet the definition of a “qualified transportation fringe” benefit under Section 132(a)(5) of the Internal Revenue Code. Included on the list of qualified fringes is qualified parking, which is located on or near the business premises of the employer but does not include any parking at or near the employee’s home.
Under the Code, the following circumstances must be satisfied: parking is provided on property that the employer owns or leases, the employer pays for the parking, or the employer reimburses the employee for parking expenses.
The amount excludable for qualified parking may not exceed $175 per month, but the amount is indexed for inflation on an annual basis and was increased to $250 per month for 2014. The $250 allowance is not affected by the use of other qualified fringe transportation benefits such as transit passes or fare cards.
How to value the cost of parking? Transportation benefits are generally valued at fair market value (FMV). In the case of parking, the FMV would be based on the cost to pay for parking at the same location over the same time period or at a comparable lot under similar circumstances. If an employer owns the lot, the FMV would be the amount the general public must pay to park. If the lot does not offer public parking, the employer should consider the amount charged by nearby parking facilities, per Regulation 1.61-21(b)(2).
Employers providing parking to employees with a fair market value of $250 or less per month can breathe easier. But in those locations where parking is a premium, employers need to be aware of Regulation 1.132-9(b) Q/A 8, which states that “an employee must include in gross income the amount by which the fair market value of the benefit exceeds the amount paid by the employee, if any, and any amount excluded from gross income under Section 132(a)(5).”
The Regulation also states that “if an employer provides an employee with a qualified transportation fringe that exceeds the monthly limit and the employee does not make any payment, the value of the benefits provided that exceed the monthly limit must be included in the employee’s wages for income and employment tax purposes.”
If the amount over and above the $250 limit is included in the employee’s wages, employers must withhold for federal income tax as well as Federal Insurance Contributions Act and Federal Unemployment Tax Act taxes.
To read IRS Information Letter 2014-0017, click here.