Parking Reimbursements for Employees: What You Should Know

There’s no way around it I know, the commute to work combined with the lack of parking in big cities is frustrating to many. Some employers have the ability to set up a Parking Reimbursement fund for their employees. 

So let’s get into it! 

Parking reimbursement is a perk where employers compensate their staff for parking expenses incurred during work duties. This perk is free from taxation. 

Employees cover the initial costs for eligible expenses, complete a claim form, and subsequently receive reimbursement through their payroll.

Eligible expenses include:

  • Parking fees, such as daily or monthly costs at a designated lot or garage
  • Metered or timed parking on the street
  • Parking expenses incurred while traveling for work
  • Expenses for parking at a job site away from the employee’s regular workplace
  • You can offer parking reimbursement as a standalone benefit, but most companies include it as part of a more comprehensive commuter benefits package.

Employees can use pre-tax dollars for parking fees associated with their employment in many jurisdictions, especially in the United States. This is usually facilitated through a benefit known as a “parking reimbursement plan” or a “commuter benefits plan.” Such plans allow employees to set aside a portion of their gross income before taxes to pay for parking if they drive to work. This arrangement can lower the employee’s taxable income and thus reduce the amount of federal, and in some cases, state and local taxes owed.

However, there are some important details to note:

  1. Limit on Exclusions: The IRS sets annual limits on the amount of pre-tax dollars that can be used for parking fees. For example, in 2023, the limit was set at $300 per month. These limits are subject to change, so it’s important to check for the most current figures. 
  2. Employer Participation: For employees to take advantage of this benefit, their employer must offer a commuter benefits plan that includes parking. Not all employers offer such plans, so it’s necessary to check with your HR department.
  3. Qualifying Expenses: Only certain parking expenses qualify for pre-tax treatment. Typically, parking must be on or near the business premises of the employer or on or near a location from which you commute to work, such as a park-and-ride lot.
  4. Compliance and Documentation: Employers offering these plans must ensure they are in compliance with IRS rules and may require documentation of parking expenses from employees.

If you’re considering implementing such a program for your employees, it might be beneficial to consult with a tax professional or benefits administrator to ensure the plan complies with tax laws and to understand the administrative requirements.