How to determine whether commuting allowance is taxable or non-taxable

Transportation costs incurred in business can be broadly divided into the following two types.

• “Commuting allowance” for officers and employees
• “Travel expenses and transportation expenses” for business trips and travel

Both are company expenses, but there are tax precautions for each. Here, we will explain in detail the tax exemption limit of “commuting allowance” and social insurance premiums among transportation expenses.

table of contents

• Is the commuting allowance tax exempt?
• What is a tax-exempt commuting allowance?
  • People who commute by transportation
  • People who commute with transportation equipment such as vehicles and bicycles
  • People who commute with a commuter pass
  • People who use transportation + transportation equipment
• Taxable commuting allowance is included in salary at year-end adjustment
• What is the consumption tax for commuting allowance?
• Specific examples of commuting allowance
  • <Pattern ①: Walk + train>
  • <Pattern ②: Car + toll road available>
  • <Pattern ③: less than 2 km>
• Commuting allowance is included in the calculation of social insurance premiums
• Summary

Is the commuting allowance tax exempt?

When it comes to transportation costs, the question “How much commuting allowance should I pay?” Is often asked. The commuting allowance can be paid at any amount set by the company. However, the allowances paid to employees are basically subject to income tax on individual employees. For example, all allowances such as housing allowance, overtime allowance, and dependent allowance are taxable.

However, in the case of commuting allowance, the taxation method is different from other allowances. Income tax is exempt if the commuting allowance is within a certain standard. The reason is that the nature of the commuting allowance is just a supplement to the actual cost of going to work and is not compatible with income.

What is a tax-exempt commuting allowance?

With commuting allowances, transportation costs are not tax exempt. The tax exempt amount is divided as follows according to the notification of the National Tax Agency.

1. People who commute by transportation
2. People who commute with transportation equipment such as vehicles and bicycles
3. People who commute with a commuter pass
4. People who use transportation + transportation equipment

Let’s take a closer look at each.

1. People who commute by transportation

The entire fare is tax exempt, but the maximum is 150,000 yen per month. However, regarding the fare, the National Tax Agency’s notification states that “when commuting by the most economical and rational route and method in light of the fare, time, distance, etc. for commuting”. For example, the usage fee for a green car is not tax exempt, even though it is a transportation fee.

2. People who commute with transportation equipment such as vehicles and bicycles

Cars, motorcycles, mopeds, and bicycles are subject to tax exemption limits based on commuting distance. The tax exemption limit does not change whether you are driving or biking. Therefore, there may be a sense of unfairness, but it is an easy-to-remember rule for the accounting side. In addition, in the example of the application after January 1, 2016, it is stipulated as follows.

• Less than 2 km (one-way commute distance; same below) -Full taxation
• 2km or more and less than 10km-3,200 yen
• 10km or more and less than 15km ― 7,100 yen
  …
• 55km or more-31,600 yen

When applying, be sure to check the latest tax exemption limit on the NTA website.

(Reference) National Tax Agency Regarding the increase in the tax exemption limit for commuting allowances

In the case of a car, there are two supplements.
The first point is the parking fee. If your company does not have a parking lot, you may use a nearby monthly parking lot. It is up to the company to pay this parking fee. However, if you bear the burden, the entire amount will be taxed and cannot be included in the tax-exempt commuting allowance.
The second point is when using a toll road. When using a toll road while commuting, the tax exemption limit is the sum of the tax exemption limit according to the distance and the toll road toll. For example, if the one-way commuting distance is 60 km and 30 km is a toll road (toll is 5,000 yen),

31,600 yen (tax exemption limit for 55km or more) + 5,000 yen = 36,600 yen

The tax exemption limit is 36,600 yen. However, the upper limit is 150,000 yen per month.

3. People who commute with a commuter pass

All commuter passes for the boarding section required for commuting are exempt from tax. However, the upper limit is 150,000 yen per month.

4. People who use transportation + transportation equipment

This applies when you go to the nearest station, which is more than 2 km away from your home, by bicycle and take a train. The tax exemption limit is the total of 1 and 2 mentioned above, and the maximum is 150,000 yen per month.

Taxable commuting allowance is included in salary at year-end adjustment

Income tax is levied on taxable commuting allowances and must be included in salary at year-end adjustment.
It will automatically calculate if taxable and non-taxable are separated using payroll software, so it is unlikely that you will make a mistake in calculating transportation expenses. However, you need to be careful if you use a handwritten pay slip or Excel created in-house. Make sure to keep a separate record of taxable and non-taxable commuting allowances on your monthly pay slip.

What is the consumption tax for commuting allowance?

If you are a company that is obliged to pay sales tax, you may be wondering whether your commuting allowance is a taxable purchase or a tax-exempt purchase.
However, the reason why the income tax on commuting allowance is exempt is to cover the actual cost. It has nothing to do with sales tax as it is not familiar with the nature of income. Therefore, the commuting allowance is basically a full taxable purchase. Treat tax credit categories with common taxable purchases unless the employee contributes only to taxable sales.

Specific examples of commuting allowance

Let’s take a look at the commuting allowance associated with transportation costs, giving some concrete examples.

<Pattern ①: Walk + train>

• Conditions
  Home-Nearest A station: Walk
  A station-B station: Train (January commuter pass fee 10,000 yen)
  B station-Company: Walk
  commuting allowance 10,000 yen
• Taxable and non-
  taxable commuting allowance: 0 yen
  Tax-exempt commuting allowance: 10,000 yen
• Journal

<Pattern ②: Car + toll road available>

• Conditions
  Home-company: 30km by car (tax exemption limit is 18,700 yen)
  Toll road: 1,000 yen
  Commuting allowance: 20,000 yen
• Taxable and non-
  taxable commuting allowance: 300 yen
  Tax-exempt commuting allowance: 19,700 yen
• Journal

<Pattern ③: less than 2 km>

• Conditions
  Home-Company: Car 1.8km
  Commuting allowance: 2,000 yen
• Taxable and non-
  taxable commuting allowance: 2,000 yen
  Tax-exempt commuting allowance: 0 yen
• Journal

There is no need to separate tax exemption and taxation in the journal. For companies that calculate payroll in Excel, it will be easier to make adjustments in the trial balance at the time of year-end adjustment if taxable and non-taxable are separated by sub-subjects.

Commuting allowance is included in the calculation of social insurance premiums

When paying commuting allowances for transportation expenses, it is easy to get lost in calculating social insurance premiums. In the case of the Japan Health Insurance Association (Kenpo), which many companies join, the social insurance premium is based on the “standard monthly salary” for each employee, and the health insurance premium is the insurance premium rate set for each prefecture. Insurance premiums are calculated by multiplying the national uniform insurance premium rate. Actually, there is a list of insurance premiums for each prefecture, so difficult calculations are not necessary.

It is easy to get confused as to whether or not to include a tax-exempt commuting allowance in the procedure for the calculation basis notification to calculate this “standard monthly salary”. In conclusion, this is included. Let’s consider an example here.

<Example>

• Monthly salary 250,000 yen
• Housing allowance 15,000 yen
• Taxable commuting allowance 800 yen
• Tax-free commuting allowance 4,200 yen

The standard monthly salary for employees who pay these monthly is 270,000 yen.

The tax exempt commuting allowance is just that income tax is exempt, and other taxes and insurance premiums are not exempt. In addition, the monthly employment insurance premium is calculated including the full amount of commuting allowance. In the above example, it is calculated by multiplying 270,000 yen by the insurance premium rate according to each business.

Summary

Finally, I will summarize the checkpoints for commuting allowances associated with transportation expenses.

• Recipient’s income tax is exempt under certain requirements
• Basically full tax exemption when using transportation
• The tax exemption limit for transportation equipment such as vehicles changes depending on the distance, but the full amount is taxed for less than 2 km.
• The maximum tax exemption amount is 150,000 yen
• There is no need to distinguish between taxable and non-taxable for treatments other than income tax.

In addition, the transportation expense / expense settlement system “Rakuraku Settlement” has abundant functions that can reduce the time and efficiency of the entire expense settlement work as well as the transportation expense settlement. If you find it difficult to process monthly deductions, check deductions, etc., why not consider introducing a transportation expense reimbursement system?