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"Free Parking" May Be a Taxable Benefit

The IRS recently released Information Letter 2014-0017 explaining to the inquirer that their free, employer-provided parking may not really be "free." The value of the free parking may, in fact, be taxable and subject to FICA, FUTA, and federal income tax withholding. Occasionally, the IRS will issue Information Letters to an inquiring individual for general information purposes only. The Information Letter itself is not binding on the IRS, but does provide insight into the IRS's position on the issue. In this particular situation, the Information Letter explained that the value of the free, employer-provided parking would be reportable to the IRS as taxable fringe benefits.

Section 132(f) provides an exclusion from income for "Qualified Transportation Plans," which includes a "qualified parking" benefit. In order for this exclusion to apply to employer-provided parking, the parking must be at or near employers' business premises and not on or near employees' homes. The parking is considered "provided" to employees if employers pay for parking, reimburses employees for their parking expenses, or if it is on property that the employer owns or leases.

For federal tax purposes, employer-provided "qualified parking" can be excluded from income up to the statutory monthly maximum amount, $250 for 2014, indexed for inflation. If the fair market value of the "qualified parking" benefit does not exceed that amount, the value can be excluded from employees' income and employers need not include the value in wages for income tax withholding or employment tax purposes. Conversely, if the fair market value of the "qualified parking" benefit exceeds the statutory monthly maximum amount, $250 for 2014, and employees do not make any payments outside of a qualified parking plan, the excess benefit must be included in employees' gross income.
For many, the fair market value of employer-provided parking is much less than the monthly maximum allowable. However, for those in major cities where parking is at a premium, the cost of parking may exceed the monthly maximum allowable. Consider the following two examples: 

Employee A receives free "qualified parking" in 2014 with a fair market value significantly less than the $250 monthly maximum allowable. No amount of the employer-provided parking is taxable.

Employee B, on the other hand, receives free "qualified parking" in 2014 with a fair market value of $300 per month. Employee B did not pay any parking expenses with taxed dollars and will have (for federal and some state tax purposes) $50 per month of additional taxable wages ($300 - $250 for 2014 = $50).

For more information, click here for IRS Information Letter 2014-0017.

Click here to download this update.