What’s the difference between a subsidy and a pre-tax deduction?

A subsidy is an employer paid benefit, whereas, a pre-tax deduction is an employee paid payroll deduction. Commuter benefits can be offered as either a subsidy, pre-tax payroll deduction or a combination of both. Offering the benefit as a subsidy is more cost effective when considering giving an employee the equivalent raise in salary due to the tax advantages. For example, a parking subsidy of $250 is roughly equivalent to a $406 pay raise which would be taxable income. A subsidy saves the employer on payroll taxes and the employee on having to pay additional taxes on a higher income.

Last update on May, 7 2014 by Elizabeth Bonney.

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