A recent Information Letter issued by the Internal Revenue Service (IRS) on the taxation of employer-provided parking, although noncontroversial, serves as a useful reminder that “free” parking for employees may result in taxes for both the employee and the employer. IRS Information Letter 2014-0017 (June 27, 2014) explains that if an employer provides a free benefit to employees for qualified parking the value of which exceeds the maximum amount that may be excluded from an employee’s income per month, the value of the benefit exceeding the exclusion limit is included in the employee’s wages for income and employment tax purposes.
Qualified Transportation Fringe Benefits Generally
Employers may provide certain transportation fringe benefits to their employees without including their fair market value in their income, including qualified parking; transit passes; vouchers; fare cards or reimbursements for fare cards by the employer; or transportation between home and work in an employer-provided commuter highway vehicle. Up to $130 per month (for 2014) is excluded from income for employer-provided transit passes and transportation in a commuter highway vehicle.
Up to $250 per month (for 2014) is excluded from income for qualified parking, and it is not reduced if combined with other qualified transportation fringe benefits.
Qualified Parking Expenses
“Qualified parking” is parking provided to an employee by an employer on or near the employer’s business premises or at a location from which the employee commutes to work using mass transit (such as a park-and-ride lot). Parking is “provided” to an employee if the employer pays for the parking (either to the operator or by reimbursing the employee) or the employer provides the parking on premises that it owns or leases.
Qualified parking does not include parking at or near the employee’s home. Also, qualified parking does not include parking on or near a work location where the employee works for the employer, if (i) the value of parking provided by the employer or reimbursement for the employee’s parking expenses is otherwise excluded from income as a working condition fringe benefit or (ii) the value of parking provided by the employer or reimbursement for the employee’s parking expenses is an employee business expense reimbursed under an accountable plan.
Determining the Value of Qualified Parking
Under the general rule for fringe benefits, transportation benefits are generally valued at fair market value (FMV). The FMV of parking provided by an employer to an employee is based on the cost an individual would have to pay for parking at the same time and site in an arm’s length transaction (or, if the employer cannot ascertain this information, in the same or a comparable lot in the general location under the same or similar circumstances).
Valuation issues generally arise when employers provide their own parking lots. Whatever the employer charges for parking to the general public is generally the amount the employee would have to pay in an arm’s length transaction. If the employer does not offer parking to the general public, the employer must consider the amount surrounding parking facilities charge when determining FMV.Treasury Regulation §1.61-21(b)(2) and IRS Notice 94-3, Q-10(a) provide more guidance.
Determining the Excess Amount Included in Income
While the FMV of employer-parking often is less than the exclusion amount (that is, $250 per month in 2014), monthly parking costs in major cities may exceed the exclusion amount. Generally, an employee is taxed on the amount by which the FMV of the benefit exceeds the monthly exclusion amount plus any amount paid by the employee with after-tax dollars for the benefit. This amount is subject to federal income tax withholding, Federal Insurance Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Thus, if an employer provides a qualified parking benefit with a value exceeding $250 per month, and the employee pays nothing for it, the value of the benefit over the limit is included in the employee’s wages for income and employment tax purposes.
In Revenue Ruling 2004-98, the IRS issued guidance forbidding “double dip” parking arrangements. A “double dip” arrangement is one in which an employer (1) reduces its employees’ pre-tax wages in return for parking provided by the employer; (2) “reimburses” the employees for that cost so that the employees’ net pay is the same as before the reduction in wages; and (3) excludes the reimbursement from the employee’s income. The ruling provides that the employer cannot exclude the same amount from income twice and concludes that the “reimbursements” are taxable income to the employees. This ruling also applies to other benefit arrangements in which pre-tax payments are reimbursed by an employer.