Pre-Tax Parking: How the Benefit Works
Understand how a pre-tax parking benefit can lower your taxable income. This guide explains the financial mechanics and the important rules for managing your funds.
Pre-tax parking is an employer-sponsored benefit that allows employees to set aside money from their paycheck for qualified parking expenses before taxes are calculated. This arrangement, governed by Internal Revenue Code Section 132, reduces an employee’s overall taxable income. By participating, individuals lower their liability for federal, FICA (Social Security and Medicare), and most state and local income taxes, making commuting more affordable.
How Pre-Tax Parking Works
The process begins when an employee elects to participate during an enrollment period. The employee decides how much money to set aside from each paycheck for parking costs, up to a federally mandated monthly limit. This elected amount is then deducted from the employee’s gross pay before any income or FICA taxes are withheld, lowering the income subject to taxation.
For example, an employee earning $2,000 bi-weekly who pays $200 per month for parking could elect to deduct $100 per paycheck. This would drop their taxable bi-weekly income from $2,000 to $1,900. If their combined tax rate is 25%, this deduction saves them $25 in taxes on that paycheck ($100 x 25%), leading to significant annual savings.
Once deducted, the funds are held in a special-purpose account. Employees can access this money in several ways, depending on their employer’s plan:
- Using a dedicated debit card at parking facilities.
- Receiving vouchers to give to a parking operator.
- Arranging direct payments from the plan to the parking provider.
- Submitting receipts for reimbursement of eligible expenses.
Eligibility and Contribution Limits
Participation in a pre-tax parking program is determined by the employer, as it is an optional fringe benefit. The program is available to employees but not to self-employed individuals or partners in a partnership.
The Internal Revenue Service sets a monthly maximum for contributions. For 2025, the monthly limit for qualified parking is $325. This amount is separate from the limit for transit passes and commuter highway vehicles, meaning an employee could contribute to both if offered by their employer. Employees elect an amount based on their actual expenses up to this maximum.
The IRS defines “qualified parking” as parking on or near the employer’s business premises. It also includes parking at a location from which the employee commutes to work, such as a lot at a train station or a carpool meeting point. Parking at or near an employee’s residence is not an eligible expense.
Enrollment and Fund Management
Employees typically enroll in a pre-tax parking plan during their company’s annual open enrollment period or when they are first hired. During this time, they estimate their monthly parking costs to determine their payroll deduction. Some plans may allow for mid-year changes following a qualifying life event, but this depends on the employer’s plan rules.
Funds in a parking benefit account do not have an annual “use-it-or-lose-it” rule. Balances roll over from month to month and from one plan year to the next, as long as the individual remains employed by the company.
The funds are tied to employment and are not portable. If an employee leaves their job, any unused balance in the account is forfeited. The money cannot be taken to a new employer or cashed out.